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DOMINICAN REPUBLIC-CENTRAL AMERICA FREE

TRADE AGREEMENT

HEARING

BEFORE THE

SUBCOMMITTEE ON

COMMERCE, TRADE, AND CONSUMER PROTECTION

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

APRIL 28, 2005

Serial No. 109–18

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON ENERGY AND COMMERCE

JOE BARTON, Texas, Chairman

RALPH M. HALL, Texas

MICHAEL BILIRAKIS, Florida

Vice Chairman

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

NATHAN DEAL, Georgia

ED WHITFIELD, Kentucky

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi, Vice Chairman

VITO FOSSELLA, New York

ROY BLUNT, Missouri

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

C.L. ‘‘BUTCH’’ OTTER, Idaho

SUE MYRICK, North Carolina

JOHN SULLIVAN, Oklahoma

TIM MURPHY, Pennsylvania

MICHAEL C. BURGESS, Texas

MARSHA BLACKBURN, Tennessee

JOHN D. DINGELL, Michigan

Ranking Member

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

LOIS CAPPS, California

MIKE DOYLE, Pennsylvania

TOM ALLEN, Maine

JIM DAVIS, Florida

JAN SCHAKOWSKY, Illinois

HILDA L. SOLIS, California

CHARLES A. GONZALEZ, Texas

JAY INSLEE, Washington

TAMMY BALDWIN, Wisconsin

MIKE ROSS, Arkansas

BUD ALBRIGHT, Staff Director

DAVID CAVICKE, Deputy Staff Director and General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON COMMERCE, TRADE, AND CONSUMER PROTECTION

CLIFF STEARNS, Florida, Chairman

FRED UPTON, Michigan

NATHAN DEAL, Georgia

BARBARA CUBIN, Wyoming

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

LEE TERRY, Nebraska

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

C.L. ‘‘BUTCH’’ OTTER, Idaho

SUE MYRICK, North Carolina

TIM MURPHY, Pennsylvania

MARSHA BLACKBURN, Tennessee

JOE BARTON, Texas,

(Ex Officio)

JAN SCHAKOWSKY, Illinois

Ranking Member

MIKE ROSS, Arkansas

EDWARD J. MARKEY, Massachusetts

EDOLPHUS TOWNS, New York

SHERROD BROWN, Ohio

BOBBY L. RUSH, Illinois

GENE GREEN, Texas

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

JIM DAVIS, Florida

CHARLES A. GONZALEZ, Texas

TAMMY BALDWIN, Wisconsin

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

C O N T E N T S

Page

Testimony of:

Cohen, Calman J., President, Emergency Committee for American Trade . 58

Kearns, Kevin L., President, U.S. Business and Industry Council .............. 47

Lee, Thea M., Chief International Economist, AFL-CIO .............................. 51

Murphy, John, Vice President, Western Hemisphere Affairs, Executive

Director, American Chambers of Commerce of Latin America, United

States Chamber of Commerce ...................................................................... 99

Roberts, Russell, Professor of Economics, J. Fish and Lillian F. Smith

Distinguished Scholar at the Mercatus Center, Department of Economics ................................................................................................................... 95

Roney, Jack, Director of Economics and Policy Analysis, American Sugar

Alliance .......................................................................................................... 89

Vargo, Frank, Vice President, International Economic Affairs, National

Association of Manufacturers ....................................................................... 67

Vargo, Regina K., Assistant U.S. Trade Representative for the Americas,

Office of the U.S. Trade Representative ..................................................... 18

Waskow, David F., Director of the International Program Friends of

the Earth ....................................................................................................... 105

Additional material submitted for the record:

Retail Industry Leaders Association, prepared statement of ....................... 123

Public Citizen, prepared statement of ............................................................ 125

(III)

(1)

DOMINICAN REPUBLIC-CENTRAL AMERICA

FREE TRADE AGREEMENT

THURSDAY, APRIL 28, 2005

HOUSE OF REPRESENTATIVES, COMMITTEE ON ENERGY AND COMMERCE, SUBCOMMITTEE ON COMMERCE, TRADE, AND CONSUMER PROTECTION, Washington, DC.

The subcommittee met, pursuant to notice, at 11:05 a.m., in room

2123, Rayburn House Office Building, Hon. Cliff Stearns (chairman) presiding.

Members present: Representatives Stearns, Bass, Pitts, Bono,

Rogers, Otter, Myrick, Murphy, Blackburn, Barton (ex officio),

Schakowsky, Markey, Brown, Green, Strickland, Gonzalez, Baldwin, and Dingell (ex officio).

Also present: Representative Solis.

Staff present: David Cavicke, chief counsel; Chris Leahy, policy

coordinator; Will Carty, professional staff; Larry Neal, deputy staff

director; Billy Harvard, clerk; Jon Tripp, deputy communications

director; Jonathan Cordone, minority counsel; Turney Hall, staff

assistant; and David Vogel, staff assistant.

Mr. STEARNS. Good morning, everybody. The subcommittee will

come to order. This is the subcommittee on the Dominican Republic-Central America Free Trade Agreement, or known as DRCAFTA. My colleagues, on a basic level, trade—particularly trade

between nations—it rests on an age-old theory of comparative advantage. The laws of economic efficiency tell us that we only should

produce goods at which we are most efficient and trade for all the

others. This helps explain why we can see efficiency gains and improved standards of living when economically disparate countries

trade with each other.

In these cases, prices reflect the most efficient means of production, which, in theory, leads to a better standard of living by effectively making all goods concerned less expensive. This basic principle has been the bedrock of free trade theory for over 200 years.

I must say at the outset that I am not here to challenge Mr. Ricardo on his elegant principle, but I do think the economic, social,

and geopolitical complexity surrounding the Dominican RepublicCentral America Free Trade Agreement would leave him a bit overwhelmed if he was trying to negotiate the agreement today.

These complexities and profound effects make it extremely important that we, as Members of Congress, understand why the DRCAFTA agreement efficiency and its net gains for our economies in

terms of import and export growth also could produce for some

2

United States job losses and less competitive U.S. products and

shifts in regional U.S. economies that create winners and losers.

Accordingly, the witnesses here before us today represent a broad

section of many of the constituencies that will feel both positive

and perhaps negative economic effects of the DR-CAFTA, many of

which constitute significant parts, of course, of many of our home

Congressional districts.

The signatories of this agreement include the United States, the

Dominican Republic, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. The agreement was signed in 2004. The

agreement would create the second largest U.S. export market in

Latin America behind Mexico.

In 2004 U.S. trade with the DR-CAFTA region represented about

1.5 percent of total U.S. foreign commerce, which amounted to

about $33 billion in trade flows, including about $16 billion in U.S.

exports to the region. The U.S. is by far the largest trading partner

to the DR-CAFTA countries. Most of the import and export trade

within the region covered by the agreement is related to the merchandise, raw material, and agricultural sectors.

Since the early 1980’s, the U.S. has provided the region one-way,

duty-free trade preferences for the region under the Caribbean

Basin Initiative. In contrast to the CBI, the DR-CAFTA is a reciprocal trade agreement that is designed to make over 80 percent of

U.S. consumer and industrial exports and over 50 percent of U.S.

farm exports to Central America duty-free immediately.

Likewise, DR-CAFTA countries would enjoy duty-free status on

all our non-textile and non-agricultural products immediately. In

addition, the agreement includes a number of unique provisions relating to expanded protection of intellectual property right, new

trade rules for e-commerce, liberalization in the telecom sector, and

improved labor standards in the region. All of these are very good.

The committee has done a great deal of work in many of these

areas, and we look forward to hearing more about the DR-CAFTA

elements today.

But even with all these beneficial provisions and market opening

and commitments, this agreement still stirs up a lot of strong opinion. I believe part of the reason is that all trade agreements represent a compromise that, in theory, is crafted to provide net gain

to all parties. It seems obvious that parties enter into trade agreements to gain, not to lose. Even so, I believe the trade can cut both

ways, regardless of economic theory. There are different regional

effects, social impacts. As I mentioned earlier, different winners

and losers regardless of the politics. I have seen them and my constituents have felt them. NAFTA, in my home district in Florida,

is probably a lot different than the one—the effects in other parts

of the country. It sits in the middle of a different regional economy.

What this committee and this Congress needs to ensure is that

those net gains from these agreements don’t outweigh the inevitable cause for some of our people back home, our farmers, our

ranchers, and local manufacturers. We must do all we can to make

sure that all of these Ricardian economic principles, efficiency

translate into economic progress for all, not stagnation or loss for

some.

3

I would also like to emphasize I support the goals of forging political and social reform in the region through increased trade and

economic progress. This is very important. It is an extremely important undertaking in a world that continues to challenge the

ideals of democracy and economic freedom. And I do believe the

DR-CAFTA can be a very, very important instrument to help

achieve these ends in this hemisphere. And this is important for

all of our colleagues to remember. The important objectives, however, must not obscure the importance of providing those most affected by a shifting economic landscape, the opportunity for them

to be successful too.

But let me be clear; stability in the region is an important strategic issue for us. I believe the United States should be the leader

in this region, and there are enormous global, political issues here

which affect economic stability and trade in these countries, and

frankly, ours too. Positive effects and results will help reinvigorate

multilateral WTO negotiations.

And I believe this is important. We just need to look at the history, post-war Europe and the positive impact trade has had for

millions of Americans and the Europeans alike to understand the

power of free trade and trading partnerships. But we must do it

right, and we must remember that true, long-term success in trade

liberalization will depend on our ability to sustain mutual longterm economic benefits for all Americans under agreements like

the DR-CAFTA.

And finally, I would like to thank sincerely the Assistant U.S.

Trade Representative Vargo and our other distinguished witnesses

from industry, agriculture, labor, academia, and other interests for

joining us here today in this open, frank discussion and providing

their views on this extremely important agreement for our country.

So we look forward to their testimony and thank them for coming.

And at that, I welcome the opening statement from the ranking

member, Ms. Schakowsky.

[The prepared statement of Hon. Clifford Stearns follows:]

PREPARED STATEMENT OF HON. CLIFFORD STEARNS, CHAIRMAN, SUBCOMMITTEE ON

COMMERCE, TRADE, AND CONSUMER PROTECTION

Good Morning. On a basic level, trade, particularly trade between nations, rests

on the age-old theory of comparative advantage. The laws of economic efficiency tell

us that we only should produce goods at which we are most efficient, and trade for

the others. This helps explain why we can see efficiency gains and improved standards of living when economically disparate countries trade with each other. In these

cases, prices reflect the most efficient means of production, which, in theory, leads

to a better standard of living by effectively making all goods concerned less expensive. This basic principle has been the bedrock of free trade theory for over two hundred years. I must say at the outset that I am not here to challenge Mr. Ricardo

on his elegant principle but I do think the economic, social, and geopolitical complexities surrounding the Dominican Republic-Central America Free Trade Agreement or DR-CAFTA would leave even him a bit overwhelmed. These complexities

and profound effects make it extremely important that we understand why the DRCAFTA agreement’s efficiencies—its net gains for our economies in terms of import

and export growth—also could produce for some U.S. job losses, less competitive

U.S. products, and shifts in regional U.S. economies that create winners and losers.

Accordingly, the witnesses before us today represent a broad cross-section of many

of the constituencies that will feel both positive and negative economic effects of the

DR-CAFTA—many of which constitute significant parts of our home districts.

The signatories of Dominican Republic-Central America Free Trade Agreement include the United States, Dominican Republic, Costa Rica, El Salvador, Guatemala,

Honduras and Nicaragua. The agreement was signed in 2004. The DR-CAFTA

4

agreement would create the second largest U.S. export market in Latin America, behind Mexico. In 2004, U.S. trade with the DR-CAFTA region represented about 1.5%

of total U.S. foreign commerce, which amounted to about $33 billion in trade flows,

including almost $16 billion in U.S. exports to the region. The U.S. is by far the

largest trading partner to the DR-CAFTA countries. Most of the import and export

trade within the region covered by the agreement is related to the merchandise, raw

material, and agricultural sectors. Since the early 1980s, the U.S. has provided the

region one-way duty free trade preferences for the region under the Caribbean Basin

Initiative (CBI). In contrast to CBI, DR-CAFTA is a reciprocal trade agreement that

is designed to make over 80% of U.S. consumer and industrial exports and over 50%

of U.S. farm exports to Central America duty free immediately. Likewise, DRCAFTA countries would enjoy duty free status on all non-textile and non-agricultural goods immediately. In addition, the agreement includes a number of unique

provisions relating to expanded protection of intellectual property, new trade rules

for e-commerce, liberalization in the telecom sector, and improved labor standards

in the region. The Committee has done a great deal of work in many of these areas,

and we look forward to hearing more about these DR-CAFTA elements today.

But even with all of these beneficial provisions and market-opening commitments,

DR-CAFTA still stirs up strong opinions. I believe part of the reason is that all

trade agreements represent a compromise that, in theory, is crafted to provide net

gains to all parties. It seems obvious that parties enter into trade agreements to

gain, not to lose. Even so, I believe trade can cut both ways, regardless of economic

theory. There are different regional effects, social impacts, and as I mentioned earlier, different winners and losers, regardless of politics. I have seen them, and my

constituents have felt them. The NAFTA that my home district in Florida knows

is probably a lot different than one in another part of the country, sitting in the

middle of a different regional economy. What this Committee and the Congress need

to ensure is that those net gains from these agreements don’t outweigh the inevitable costs for some of our people back home—our farmers, ranchers, and local manufacturers. We must do all we can to make sure all those Ricardian economic efficiencies translate into economic progress for all, not stagnation and loss for some.

I also would like to emphasize that I support the goals of forging political and

social reform in the region through increased trade and economic progress. This, I

agree, is an extremely important undertaking in a world that continues to challenge

the ideals of democracy and economic freedom. And I do believe DR-CAFTA can be

a very important instrument to help achieve those ends in this hemisphere. The important objectives, however, must not obscure the importance of providing those

most affected by a shifting economic landscape the opportunity to be successful too.

But let me be clear, stability in the region is an important strategic issue. I believe

the United States should be the leader in this region and there are global political

issues here which offer economic stability in trade. Positive efforts and results will

help reinvigorate multilateral WTO the Doha Round negotiations. I believe that is

important. We just need to look at the history postwar Europe and the positive impact trade had for millions of American and Europeans alike to understand the

power of free markets and trading partnerships. But we must do it right. And we

must remember that true long-term success in trade liberalization will depend on

our ability to sustain mutual long-term economic benefits for all Americans under

agreements like DR-CAFTA.

Finally, I would like to thank Assistant U.S. Trade Representative Vargo and our

other distinguished witnesses from industry, agriculture, labor, academia, and other

interests for joining us today and providing their views on this extremely important

agreement for our great county. We look forward to your testimony. Thank you.

Ms. SCHAKOWSKY. Thank you, Mr. Chairman. I am pleased that

the subcommittee is taking the time to review the proposed Dominican Republic-Central America Free Trade Agreement, DR-CAFTA.

I want to welcome and thank all of our witnesses and all of the

members that have come. And I am particularly glad to see that—

I know that our ranking member of the full committee will be here,

and I want to acknowledge also the work of Mr. Brown. While he

is the ranking Democrat on the House subcommittee, he is one of

our best trade experts. In fact, he wrote the book, or at least a

book, on trade called ‘‘Myths of Free Trade.’’

For many common-sense reasons, there is wide and growing bipartisan opposition to this bill here in Congress. It endangers

5

workers and jobs in the United States and abroad. It endangers

our economy and it endangers our environment. Opposition to Congressional implementation of this flawed agreement also runs deep

outside of the Congress, throughout this country and other signatory nations. The public, as well as leaders from among organized

labor, environmentalists, economists, and business owners, and the

clergy, all strongly oppose the measure.

I am opposed to DR-CAFTA. It does not include the necessary

labor and human rights protections or environmental standards

that I believe should be at the center of our trade policies. Instead,

implementation of DR-CAFTA would result in the loss of even more

U.S. jobs, U.S. support for substandard working conditions in other

countries, and the degradation of our precious environment.

I strongly support increased global trade for the United States.

However, when negotiated, I believe free trade agreements should

place human rights and labor rights and the environment on equal

par with the rights of capital. DR-CAFTA fails to do so. Implementation of DR-CAFTA would further the failed experiment that was

NAFTA.

As a result of NAFTA, my home State of Illinois has suffered the

loss of over 100,000 jobs. And the Nation has lost almost a million

jobs due to the displacement of production that supported them

prior to the implementation of NAFTA.

Free trade agreements like NAFTA and PNTR for China perpetuate the race to the bottom in the global economy. They lower

working and living standards for workers in other countries, and

they kill jobs in the United States. And DR-CAFTA will be no different.

The only way to prevent the race to the bottom is to try and raise

standards in other countries so the lure of near slave labor does not

exist and does not harm our workforce.

NAFTA, PNTR, and CAFTA all failed to meet this standard. This

is one of the great challenges of the 21st century. If we fail to meet

it in the right way, it will continue to have dire effects on our workforce and our economy.

Instead of pursuing policies that undermine the rights and security of U.S. workers and workers in other countries, the United

States should lead the world by example through a trade policy

that improved the lives of individuals and not just add to the profits of major corporations. Our policies should benefit workers here

in this country, create and sustain jobs, and help our small and

medium-sized and family owned businesses grow. DR-CAFTA will

not accomplish these goals.

The labor provisions of CAFTA are intentionally unenforceable.

Violations of core labor standards cannot be taken to dispute resolution. The commitment to enforce domestic labor laws is subject

to remedies weaker than those available for commercial disputes.

This violates the negotiating objective of fast-track that equivalent

remedies should exist for all parts of an agreement.

Further, the ‘‘enforce your own laws’’ standard allows countries

the opportunity to rewrite and weaken their labor laws to attract

investment.

I dispute the attempts by free trade proponents to reduce the debate to a choice between free trade and no trade, this agreement

6

or no agreement. We can do better. We can achieve our economic

objectives and moral responsibilities through responsible trade.

And we can and should go back to the drawing board and fix

CAFTA if we want to do it right and if we want to give it even a

chance to pass.

If the vote were today, it is clear that DR-CAFTA would fail to

win a majority of votes in the House because it fails our economy,

our workforce, our environment, and our moral standard on so

many levels. Thank you, Mr. Chairman.

Mr. STEARNS. I thank my colleague. We have a vote, and we are

going to temporarily recess the subcommittee. And I will be right

back. I urge my members to come back. We hope to have everybody

back after the vote. So it is temporarily recessed.

[Brief recess.]

Mr. STEARNS. The subcommittee will reconvene. We will continue

with our opening statements, and we will go to—if Mr. Murphy is

ready.

Mr. MURPHY OF PENNSYLVANIA. Mr. Chairman, my only statement is I am here interested to learn about this. I have not yet

staked out a position on this issue, and so I am most interested in

hearing the testimony today and look forward to that. Thank you,

sir.

Mr. STEARNS. I thank my colleague. Ms. Baldwin.

Ms. BALDWIN. Thank you, Mr. Chairman. The terms on which we

conduct international trade are vital to answering some of the most

fundamental questions about what our Nation and our world would

be like in the decades to come, and in fact into the next century.

How do we enhance and expand international trade while protecting our environment? How do we promote sustainable economic

development? How do we prevent a spiraling decline in wages and

worker safety protections? How do we ensure fair prices for our

family farmers so that they can continue to survive and prosper?

These are difficult questions that must be addressed. Unfortunately, our trade agreement track record has failed to adequately

address these critical issues.

The Dominican Republic-Central America Free Trade Agreement

presented an opportunity to take a fresh approach to create free

and fair trade. It was a chance to negotiate a new type of trade

agreement that addressed the issues of wages and worker safety,

of raising environmental and health standards, and of advancing

the rule of law and human rights.

International trade could and should be an issue which brings

people together around the world. Trade can deter war and enhance peace. I believe the only way to build an effective global

trading system is to construct it through a democratic process. Not

only must the people be engaged in its development, but the results

must address their very real concerns.

We will never be able to sustain a trade system that results in

a race to the bottom, the bottom in wages, the bottom in air and

water standards, the bottom in worker safety, or the bottom in

human rights. DR-CAFTA is a bad deal for the people of the

United States, the people of the Dominican Republic, and the people of Central America. And this committee and this Congress

should reject it. I yield back.

7

Mr. STEARNS. The full committee chairman, the distinguished

member from Texas, is recognized.

Chairman BARTON. I was willing to suspend for Mr. Pitts if he

was ready to go. Thank you, Mr. Chairman, for holding the hearing

today. Our committee has jurisdiction over many aspects of international trade, and I am glad that we are having a full discussion

of the issues involved with this particular trade agreement.

I am glad that the USTR is here today. It is important for the

administration to come before the committee and make its case to

the members on the merits of these trade agreements. I look forward to what they have to say about DR-CAFTA.

Under this agreement 80 percent of U.S. consumer and industrial export and over 50 percent of U.S. farm exports to Central

America would become duty-free immediately. This means more

markets for American goods. According to a study by the United

States International Trade Commission, American consumers

would benefit to the tune of $166 million a year. U.S. exports to

DR-CAFTA countries are estimated to increase by 15 percent,

while imports are estimated to increase by 12 percent. The American Farm Bureau Federation estimates the agreement would expand farm exports by as much as $1.5 billion a year. If we are committed to making rural America not just a good place to live, but

a good place to make a living, it is hard to imagine another government policy that will do the job as well as DR-CAFTA.

Moreover, markets never available to American telecommunication companies—an industry in which we are extremely competitive, and which is under this committee’s jurisdiction—would be

opened, most notably in Costa Rica where the industry is run by

government-owned monopoly.

Some will argue that these increases in trade aren’t worth it, the

stress of commercial competition that comes with them. It is true

that when competition asserts itself, not everyone prospers, but the

net future benefits to American consumers, American farmers, and

American industry are large, important, and plain to see for anyone who is truly looking in an objective fashion.

Significant advances in e-commerce, better protection of intellectual property, progressive environmental protections make DRCAFTA an important step forward in trade negotiations.

More than just the economic advantages, passing this agreement

does more than a thousand speeches to tell the developing world

about the benefits of democracy and the rule of law. It will reinforce the political reforms in Central America that have helped in

fighting terrorism, organized crime, and drug trafficking.

I want to thank our witnesses for their attendance and input

today. I am glad that we have this opportunity to learn more about

DR-CAFTA, but go ahead and count me as a supporter. With that,

Mr. Chairman, I yield back.

[The prepared statement of Hon. Joe Barton follows:]

PREPARED STATEMENT OF HON. JOE BARTON, CHAIRMAN, COMMITTEE ON ENERGY

AND COMMERCE

Thank you, Mr. Chairman, for holding this hearing today. Our Committee has jurisdiction over many aspects of international trade, and I am glad that we are having a full discussion of the issues involved with this trade agreement.

8

I am particularly glad that USTR is here today. It is important for the Administration to come before the Committee and make its case to the Members on the merits of these trade agreements. I look forward to what they have to say about DRCAFTA.

Under this agreement, over 80% of U.S. consumer and industrial exports and over

50% of U.S. farm exports to Central America would become duty-free immediately.

This means more markets for American goods. In fact, according to a study by the

United States International Trade Commission, American consumers would benefit

to the tune of $166 million a year. U.S. exports to the DR-CAFTA countries are estimated to increase by 15%, while imports are estimated to increase by 12%. Furthermore, the American Farm Bureau Federation estimates the agreement could expand

U.S. farm exports by as much as $1.5 billion a year. If we are committed to making

rural America not just a good place to live, but a good place to make a living, it’s

hard to imagine another government policy that will do the job like DR-CAFTA.

Moreover, markets never available to American telecommunications companies—

an industry in which we are extremely competitive—will be opened, most notably

in Costa Rica where this industry is run by a government-owned monopoly.

Some will argue that these increases in trade aren’t worth either our time, or the

stress of commercial competition that come with them. It is true that when competition asserts itself, not everyone will prosper, but the net future benefits to American

consumers, American farmers, and American industry are large, important, and

plain to see for everyone who looks.

Also, significant advances in e-commerce, better protection of intellectual property, and progressive environmental protections make DR-CAFTA an important step

forward in trade negotiations.

More than just the economic advantages, passing this agreement will do more

than a thousand speeches to tell the developing world about the benefits of democracy and the rule of law. And it will reinforce the political reforms in the Central

American world that have helped in fighting terrorism, organized crime, and drug

trafficking.

I thank all our witnesses for their attendance and input today, and I am glad we

have this opportunity to learn more about DR-CAFTA, but go ahead and count me

in as a supporter.

Thank you and I yield back.

Mr. STEARNS. Thank you, Mr. Chairman. And the ranking member, Mr. Dingell, is recognized. Ranking member of the full committee.

Mr. DINGELL. Mr. Chairman, thank you for your courtesy and

thank you for holding this hearing. It is a matter of great concern

to many of our constituents, and it is a matter of importance to

American industry and American labor.

I am pleased that you were able to obtain at the eleventh hour

the cooperation of the United States Trade Representative’s Office.

And they have sent a witness to join us. For many years I have

found them to be quite helpful to this committee when we were

evaluating matters of trade. It is nice to see them back. And I look

forward to many more appearances in the future. I am troubled by

the difficulty in procuring their cooperation, but I am sure they will

understand they have a responsibility to respond to the concerns

of the chairman and the members of this committee.

I begin by pointing out that CAFTA is a bad agreement. It is bad

for workers. It is bad for the environment. It is bad for farmers.

We need not guess how this agreement will harm our constituents,

for this agreement is merely the son of NAFTA. If you were pleased

with how NAFTA has affected your workers and your farmers, then

you should support this agreement with enthusiasm. If you believe

that labor standards and environmental quality have significantly

and dramatically improved in Mexico, as we were told they would,

then you should, by all means, support this agreement.

9

Evaluate carefully the claims that will be made today about

CAFTA. For example, we are going to hear today that CAFTA will

open important markets for U.S. goods. Sound familiar?

As we learned from NAFTA, if labor standards are not improved

as a part of these agreements, few workers in these markets will

be able to afford our goods. The end result is we will not be helping

the workers in the area. We will not be helping our own workers.

We will not be opening markets. And we will be conferring no economic advantage in the United States or, indeed, upon the workers

in the countries this agreement affects.

We make cars and trucks in my home State of Michigan. American auto manufacturers are currently putting over $1,400 in

healthcare cost into each and every American-made car. The average Nicaraguan worker earns only about $2,300 a year. That is for

an entire year’s work. While the rising healthcare burden on American manufacturing is an important issue for another day, it illustrates the absurdity of the claims made. How many cars can we

reasonable expect to sell in new markets under these conditions?

I suspect very few.

I urge my colleagues to examine this agreement with great care,

and to do so closely, as I intend to do. As you peel back the layers

of this onion, I am confident that any careful and scrupulous viewer will be struck by an overwhelming sense of deja vu and a strong

feeling of frustration at promises that have not been kept in the

past and clearly that cannot and will not be kept in the future.

I have rarely seen a more appropriate occasion for the old adage,

if you fool me once, shame on you. If you fool me twice, shame on

me. I urge my colleagues not to be fooled by the son of NAFTA.

Mr. Chairman, I thank you for this hearing. I yield back the balance of my time.

Mr. STEARNS. Gentleman yields back the balance of his time. The

gentlelady from Tennessee is recognized.

Ms. BLACKBURN. Thank you, Mr. Chairman. I will waive and

save my time for questions.

Mr. STEARNS. All right. Mr. Brown.

Mr. BROWN. Thank you, Mr. Chairman. I thank you very much

for your leadership, Chairman Stearns and Ranking Member

Schakowsky, for your leadership. And a special thanks to Brett

Gibson for his terrific work on this too.

Today, April 28, is the 11-month anniversary of the signing of

the Central America Free Trade Agreement. Every trade agreement that President Bush has signed was voted in by Congress

within 60 days. Within 60 days. It has been 330 days since CAFTA

was signed by the President. May 28, the date by which Leader

Delay and Chairman Thomas will be voted on will mark the 1-year

anniversary of when the President signed the Central America

Free Trade Agreement.

Because CAFTA is so unpopular and because trade policy in this

country is so wrong-headed, that is why it clearly hasn’t come up

for a vote. Democrats support free trade. We support a trade agreement with CAFTA nations, but we don’t support the misguided

agreement that USTR has negotiated. We need to remember that

CAFTA is non-amendable, no side agreements, no side deals. If it

10

is not in the core text of the agreement, it simply doesn’t mean

anything. As Mr. Dingell said, we have been down that road before.

One of the arguments that we hear a lot is that CAFTA nations

are large markets for U.S. goods. If we pass this agreement, the

same promises that Mr. Stearns and I have been hearing on

NAFTA and PNTR, if we pass this agreement, it will be more exports for America, more jobs for America, growth and manufacturing for America. And they tell us especially that these CAFTA

nations are large markets. But just do the math. The combined

purchasing power of the Central American nations in CAFTA is the

same of that—combined as the purchasing power of Columbus,

Ohio or Memphis, Tennessee, Orlando, Florida or Pittsburgh,

Pennsylvania.

CAFTA nations simply are not robust export markets for us. The

average salary of a Nicaraguan worker is $2,300 a year, $191 a

month. Nicaraguan workers can’t afford to buy the cars we make

in Ohio; they can’t afford the cuts of U.S. prime beef at $13 a

pound; they can’t afford textiles and apparel from Georgia and

North and South Carolina; they can’t afford to buy software made

in Seattle. I ask CAFTA supporters what American-made product

can Central American workers purchase who are earning less than

$200 a month. CAFTA supporters simply don’t answer those questions.

If corporations were serious about creating robust export markets

for American goods, they would be working to ensure the Central

American Free Trade Agreement’s nation’s labor standards increased. Perhaps we should call this the Central America Free

Labor Agreement rather than the Central America Free Trade

Agreement because only when Central American workers will earn

enough to buy U.S. goods will trade be successful.

The Central America Free Trade Agreement expands the failed

trade policies of its dysfunctional cousin, the North American Free

Trade Agreement.

When I ran for Congress in 1992, the United States had a $38

billion trade deficit. Last year, a dozen years later, we had a $620

billion trade deficit, $38 billion to $620 billion in a dozen years.

The more you look at the face of this Central America Free Trade

Agreement, the better you see who will benefit and who will pay

the price. When the world’s poorest workers can buy American

products rather than just make them, then we will know that our

trade policies are finally succeeding. Unfortunately, the CAFTA before us will not succeed in doing that. Thank you, Mr. Chairman.

Mr. STEARNS. Thank you, gentlemen. Mr. Pitts, just to confirm,

did you waive? Okay. Mr. Rogers?

Mr. ROGERS. Thank you, Mr. Chairman. I do believe that I will

waive, but I do want to congratulate you on reasserting this committee’s jurisdiction on trade. I think that is incredibly important.

Mr. STEARNS. Thank you. Mr. Green, the gentleman from Texas.

Mr. GREEN. Thank you, Mr. Chairman. And like my Michigan

colleague, I want to thank you for making sure our committee continues our jurisdiction over trade. I want to thank you and also our

ranking member for holding this hearing on CAFTA.

11

I am pleased to see that the committee exerted our trade jurisdiction, giving committee members an opportunity to express our

views on this particular trade agreement.

As a business major at the University of Houston and being in

business for 23 years, I am no stranger to the theory of competitive

advantage and the promises it held for countries around the world.

But I know all too well that theory and promises are very different.

What may sound good in the business college classroom doesn’t

work out in the real world.

The unfortunate reality is that the bulk of our free trade agreements have led to the erosion of our once-great manufacturing sector and the middle-class jobs it created. And I am proud to represent the third most blue collar district in our country. My constituents are the type of hard-working people all across this country who lost their jobs as a result of free trade agreements we have

entered in the last 10 or 15 years. In fact, NAFTA alone led to a

50,000 net jobs loss in my State of Texas. Now, Texas benefited

economically, but not the folks that I represent.

And don’t get me wrong, I don’t have a blanket opposition to free

trade agreements, per se. Last year I voted for the U.S.-Australia

Free Trade Agreement because Australia and the U.S. have comparable standards of living. And the agreement put the two nations

on a level playing field. That agreement facilitated not only free

trade between the two countries, but fair trade as well.

While my primary concern is with protecting the American worker, I am highly suspicious of this agreement’s ability to better the

lives of workers in the CAFTA countries. It is no secret that this

agreement was modeled after NAFTA, which I voted against. One

would think our country would learn from the many failures of

NAFTA instead of applying the near identical trade provisions in

Central America and the Dominican Republic.

It is easy to form a picture of what life for the Central American

workers would be like under CAFTA. All we have to do is look at

how the typical Mexican worker has fared under NAFTA. Unfortunately, the answer is not too well. In February I was in the central

part of Mexico and discussed the problems that they have had with

the loss of their job base, first with NAFTA with the agriculture

sector, but now after permanent trade relations with China, so

many of those jobs that moved to Mexico are now moving to China.

True, the wealth in Mexico increased, but it is not distributed evenly.

Since NAFTA, an additional 19 million Mexicans are impoverished, and President Vicente Fox has stated that 54 million Mexicans can’t meet their basic needs. With 10 percent of the Mexican

population controlling half of the nation’s wealth, it is easy to see

that the average Mexican worker has not been a beneficiary of

NAFTA. And I see that in our own country. We have seen, since

1993 when NAFTA was passed, the huge disparity between the

CEO pay and the people that I represent.

Like NAFTA, CAFTA also disregards the interest of the American worker. CAFTA puts our country at a competitive disadvantage because Central American countries and the Dominican Republic have much lower standards of living than the United States.

The blue collar workers in my district receive a living wage and

12

make a thriving middle class in Houston. They cannot compete

against the same worker in Nicaragua whose wages hover around

$200 a month for the average worker. CAFTA would not better the

lives of American workers. Instead, it would just open the door for

American multinational corporations to shift operations overseas

for cheap labor.

Make no mistake; this is not in the interest of the American

worker. It is high time our county, both Democrat and Republican,

stop giving away the farm on free trade agreements. Our country’s

livelihood is manufacturing, and the middle class is at stake. Mr.

Chairman, I yield back what time I have left.

Mr. STEARNS. Thank the gentleman. The gentlelady from California, Ms. Bono.

Ms. BONO. Thank you, Mr. Chairman. I have been a long-time

supporter of free and open trade. However, this time, I do harbor

some reservations about supporting CAFTA. First, I am concerned

about its impact on U.S. agriculture. Specifically, I am worried

about how it would affect American-grown fresh fruits and vegetables, which are the mainstay of the agricultural industry in California’s 45th Congressional District.

According to the USDA’s Economic Research Service, between

the years 2000 to 2004, the countries included in the Central

America Free Trade Agreement imported nearly $1 billion of fresh

fruits each year. The U.S. exported an average of $295,000 of fresh

fruits during the same period. In the vegetable industry the percentages are very similar. From 2000 to 2004 the U.S. imported an

average of $96.5 million worth of fresh and frozen vegetables from

Central America while exporting a mere $79,000 worth of vegetables to that part of the world.

While I do not believe we should put up trade barriers, I do think

we should ensure a level playing field. One important step toward

this goal is adopting mandatory country of origin labeling without

delay.

But without question, my biggest reservation about supporting

CAFTA has to do with intellectual property rights. While countries

in this trade agreement are not necessarily the world’s leaders in

violating international IP agreements, it is difficult for me to imagine how we could convince these nations to be law-abiding when we

do not do nearly enough to ensure the compliance of other trading

partners like China.

I realize many sectors of the agricultural, entertainment, and

technology industries are supportive of CAFTA, free trade, if it is

fair, is valuable to our economy. But I believe we need to get our

own house in order prior to opening our doors to more trading partners. If we keep looking the other way and delay getting tough on

IP violations, we will be weakened by our own doing.

Mr. Chairman, I will keep an open mind when it comes to weighing the pros and the cons of this trade agreement, and I look forward to hearing from these witnesses today. Thank you, and I yield

back.

Mr. STEARNS. Thank you. Mr. Gonzalez.

Mr. GONZALEZ. Thank you very much, Mr. Chairman. I am going

to try to be brief. Then I am going to be asking for permission to

do something, which I am not sure that I am allowed. But with the

13

chair’s permission, I should be able to do it if I don’t take up all

of my time I—quickly, this is the greatest fear. You have heard everyone speak at this point. You can pretty well figure out if they

are for or against this. I am one of those whose mind has not been

made up, and I sincerely mean that. And I am waiting for persuasive arguments from both sides.

This is what I fear and I would caution against. In the January

25 issue of ‘‘Congress Daily,’’ this was the report: ‘‘The Bush Administration and K-Street backers of the U.S.-Central America

Free Trade Agreement will argue that the pact reinforces political

stability in the region and try to cast opponents of the agreement

as anti-Hispanic.’’ Sources familiar with the pro-CAFTA coalition

strategy said, ‘‘What message would it send to say we are not going

to trade with poor Latinos,’’ said a U.S. tradeofficial who has been

in contact with the pro-CAFTA business lobby on strategy for lobbying Congress on the agreement.

I can tell you this right now. You will lose many individuals out

there if you don’t argue this thing on the merits. We are openminded and will be objective, but the proponents and opponents

must be objective in their own analysis and give us the best arguments as to why we should be for or against this particular agreement.

At this time, Mr. Chairman, I would like to yield the balance of

my time to Ms. Solis if that is proper and acceptable.

Mr. STEARNS. Sure. That is fine. Go ahead.

Ms. SOLIS. Thank you, Mr. Chairman, and thank you, Congressman Gonzalez. I simply want to ask for unanimous consent to provide my statement for the record. But I do want to underscore that

I am apposed to the DR-CAFTA agreement.

I am one of the few if—I think only Central American Members

of Congress by birth on my mother’s side. I have been to Nicaragua

and I have been to Mexico, and I have seen what has happened

with NAFTA and also the results as of 2 years ago in Nicaragua.

And I see that there are many American corporations there and

know that there are many people that are being oppressed, many

young women who are being told that they can come in and get

jobs there and are asked to work 12 and 15 hours, are not allowed

to organize, and are not given proper healthcare and environmental

protections.

I saw it for myself, and I have to tell you that I am happy that

we are having this hearing and would hope that we have more discussion and debate on this. But I do want to register my opposition

and provide my statement for the record. Thank you, Mr. Chairman.

[The prepared statement of Hon. Hilda Solis follows:]

PREPARED STATEMENT OF HON. HILDA L. SOLIS, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

Mr. Chairman, I am strongly opposed to the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA).

DR-CAFTA is largely based on the North American Free Trade Agreement

(NAFTA). By signing DR-CAFTA, the Bush Administration has ignored the mistakes of NAFTA. Ten years ago, NAFTA proponents promised increased wages and

economic development in the United States, Mexico, and Canada and decreased migration. The agreement has failed on all accounts.

14

DR-CAFTA may create jobs for women, but the working conditions are unimaginable to the American public. The bulk of these jobs are in the maquiladoras. I have

visited Mexico and seen firsthand the devastating consequences of NAFTA. In the

maquiladora zone in Ciudad Juarez and other border cities, wages are low, union

organizing is suppressed, and industrial pollution jeopardizes the health of workers

and residents. Women that work in the maquiladoras have reported forced pregnancy testing, sexual harassment, and physical abuse. DR-CAFTA does not require

compliance with international labor rights and does not protect women from discrimination.

Inadequate free trade agreements, such as NAFTA, not only hurt women workers

abroad, but also hurt American workers. Over 750,000 jobs in the United States

have been lost because of NAFTA. DR-CAFTA will mean more job loss and wage

decline for American workers.

U.S. Latino workers have been disproportionately hurt by NAFTA because they

tend to be concentrated in industries such as textiles and other manufacturing sectors. While Latinos represent 12.6 percent of the total U.S. workforce, they account

for 26 percent of textile and apparel industry workers. In California, Latinos make

up an estimated 80 percent of the California garment industry.

Americans believe that we should NOT pursue future free trade agreements similar to NAFTA. 51 percent of American voters oppose NAFTA and claim it has hurt

workers, wages and has cost us jobs. The League of United Latin American Citizens,

LULAC, the oldest and largest Latino civil rights organization in the U.S., publicly

opposes DR-CAFTA. LULAC believes that DR-CAFTA ‘‘falls short of being acceptable’’ and fear that CAFTA will unleash enormous loses for all workers, in the U.S.

and Central America.

As the only Member of Congress of Central American descent, I understand the

importance of supporting efforts to promote sustainable development and preservation of the agricultural sector in that region. However, U.S. policy towards Latin

America should go beyond free trade policies that do little to raise wages and working conditions for the poor.

Those who oppose DR-CAFTA do so because of the irreparable harm it will have

to the economy and workers of Central America and the United States. We can not

allow the failures of NAFTA be reproduced through DR-CAFTA.

Mr. STEARNS. By unanimous consent, so ordered. Mr. Otter.

Mr. OTTER. Thank you, Mr. Chairman. And thank you for your

leadership in calling this I think very, very important hearing.

Long before I was a Member of Congress I was a businessman,

and I traveled to more than 80 foreign countries selling French

fries from Idaho all over the world. I know the importance of free

trade agreements, and I also understand the frustrations of trade

barriers. However, I have seen the harmful impacts of some trade

agreements, especially when they are not properly enforced, such

as the lack of enforcement regarding our present North American

Free Trade Agreement, otherwise known as NAFTA. And other

agreements that have led to tensions between the United States

and Canadian beef, potato, and softwood lumber industries, as well

as the Mexican bean and sugar beet industries.

I am particularly concerned that the Dominican Republic-Central

America Free Trade Agreement, as currently drafted, will significantly harm Idaho’s agricultural industry and have a severe impact

on our economy. Sugar is the third largest crop in Idaho, sugar

beets. There more than 950 farming families that grow sugar beets

in Idaho and thousands of workers employed by the three sugar

processing facilities that we have in the State. If DR-CAFTA

passes, they are all in serious jeopardy. Nay, nay say many. I say

look across my border. I can throw a rock to Nyssa, Oregon, which

recently shut down its plant.

Earlier this year a sugar factory closed down in Nyssa, Oregon.

It shut down because America’s market already is oversupplied by

foreign sugar that existing trade agreements require the United

15

States to accept from 41 countries. That town was devastated. Additional sugar from Central American countries will further depress the market and hurt Idaho.

When people say we are just talking about sugar, they are not

recognizing the realities of farming where I come from. You can

only grow sugar beets 1 year out of three in Idaho. And putting one

commodity out of business, such as sugar, will only cause overproduction in the other commodities like potatoes and wheat.

Many commodity groups tell me that I should support this agreement because it is good for agriculture. However, I cannot support

a proposal that it may provide a benefit for some, while almost certain devastation to others.

The sugar industry is still trying to work out problems created

by the loopholes that we now see with NAFTA. And it took us

years to close up some of those holes. The sugar provisions of DRCAFTA send a dangerous precedent to our foreign negotiation free

trade agreements of the Americas.

Behind the CAFTA countries, 21 other sugar-exporting countries

are lined up for their gift from the United States. Combined with

these 21 countries, over 25 million tons of sugar, nearly triple the

U.S. consumption, are present.

The precedent that DR-CAFTA concession would set would make

it impossible for the U.S. sugar industry to survive—future agreements. While I believe we should develop free trade policies—it

makes the field more level for U.S. farmers and manufacturers—

I will not support this or any other new trade agreement that is

harmful to my State. Thank you, Mr. Chairman.

Mr. STEARNS. Thank you, gentleman. The gentleman from Ohio,

Mr. Strickland.

Mr. STRICKLAND. Thank you, Mr. Chairman. I would like to

thank our witnesses for being here today to give us an opportunity

to flesh out the truth behind the proposed agreement.

DR-CAFTA is based on the same misguided notions that NAFTA

was in 1994. NAFTA has failed. It has failed to fulfill the promises

made to the American people. And so I ask, why in the hell would

we proceed to follow a failed model? In the 11 years since NAFTA

was implemented, our trade deficit with Mexico and Canada has

grown by over 1200 percent according to the ‘‘Wall Street Journal.’’

As many as one million good-paying jobs have been displaced here

at home. In my State of Ohio alone some 46,000 jobs have been lost

as a result of NAFTA.

We should have learned out lesson of free trade agreements negotiated under the Clinton and the Bush Administrations. At a

time when our total trade deficit stands at a whopping 6 percent

of GDP, we cannot afford to continue to allow unfettered advantage

to our competitors.

The truth is that the Central American countries can produce

goods cheaper than we can; thus, NAFTA and CAFTA simply allow

companies to export jobs to cheaper labor and sidestep labor laws

and environmental standards. It is an unbalanced equation that

fails to benefit workers on either side.

The question that needs to be asked is what can we gain from

CAFTA? The $3 billion in additional exports the supporters project

would be a mere .25 percent of our total exports of goods. The comVerDate 11-MAY-2000 11:43 Aug 30, 2005 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 21632.TXT HCOM1 PsN: HCOM1
16

bined economies of all CAFTA partners are less than the economy

of Cleveland, Ohio. There is simply nothing for us to gain, much

to lose.

I visited Mexico during the last year. I talked to a worker who

works 91⁄2 hours a day, 5 days a week. Her total take-home pay is

$38. American workers deserve more. We owe it to them to secure

their livelihoods, to protect their jobs, and not jeopardize both to

corporate special interests.

Eleven years ago, this country made a critical misstep by enacting NAFTA. It is imperative that we stand firm against CAFTA

and prevent making the same mistake twice. I believe the President should withdraw this agreement from consideration and do

what he was elected to do: set about rebuilding the American economy. I yield back my time.

Mr. STEARNS. Thank you, gentleman. I think our opening statements are done.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. BARBARA CUBIN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF WYOMING

Thank you, Mr. Chairman, for holding this timely hearing.

I would also like to thank the distinguished witness panels who have joined us.

They represent a diverse group of interests, all of which would be impacted by the

Dominican Republic-Central American Free Trade Agreement (DR-CAFTA). I anticipate an open debate to help Members as well as the public take an honest look at

this proposed trade agreement.

I have always supported fair trade, but as it is written, the DR-CAFTA will not

garner my support. The State of Wyoming, which I represent, yields numerous superior exportable products which stand to benefit from the increased visibility and expanded market access provided by most Free Trade Agreements (FTA’s). However,

DR-CAFTA stands to negatively impact two crucial sectors of Wyoming’s agriculture

community, and for this reason, I cannot support this trade agreement.

Despite what you might hear from detractors, sugar is currently the sole commodity that operates at no cost to U.S. taxpayers. Previously enacted trade agreements already require the U.S. to import 1.26 million tons of sugar annually. This

forces American sugar growers to store about 600,000 tons of sugar annually, at

their own expense, due to the fact their production is limited to a specificied market

share. Approving DR-CAFTA will more than double signatory nations’ duty-free access to the U.S. market, further jeopardizing the already strained economic health

of America’s sugar farmers. Since 1996, 30% of all U.S. sugar beet and cane mills

have been forced out of business, including one in my own state, and it just has

to stop.

The DR-CAFTA is not advantageous to America’s cattle producers, either. Proponents have touted the reduced tariffs on high-priced cuts of beef exported to Central America while ignoring the fact almost half the citizens of this region live in

poverty—by their standards. In return, it would provide signatory nations with immediate duty-free access to the U.S. market, despite the fact that none of these nations is declared free of BSE, or ‘‘mad cow disease.’’ Without the full implementation

of mandatory Country of Origin Labeling, American families have no way to choose

domestic beef products. Simply put, DR-CAFTA undermines the stability of American cattle producers and the safety of consumers.

The goal of a free trade agreement is to promote the free exchange of goods and

services, and DR-CAFTA does not do so in a reciprocal manner. This agreement will

offer artificial competitive advantages to foreign food producers and take away from

the families in states like Wyoming, who rely on agriculture for their stability and

livelihood. America can do better for it’s producers, and it’s time for Congress to

send this agreement back to the table.

Again, I thank the Chairman, and I yield back the balance of my time.

17

PREPARED STATEMENT OF HON. LEE TERRY, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF NEBRASKA

Mr. Chairman, I want to thank you for holding this important hearing on the Dominican Republic-Central America-U.S. Free Trade Agreement (DR-CAFTA).

I am a strong supporter of free trade and the Administration’s efforts to remove

trade barriers across the globe. As an agriculture-based state, Nebraska and all of

its citizens depend on opening new markets and finding new customers around the

globe. Exports help support more than 47,000 Nebraska jobs—both on and off the

farm in food processing, storage, and transportation. In 2003, Nebraska’s farm cash

receipts were $10.6 billion, and agricultural exports were estimated at $3 billion,

putting its reliance on agricultural exports at 29 percent.

Like many others, I am concerned about America’s shrinking trade surplus in the

agricultural sector. I support the DR-CAFTA efforts because, overall, U.S. agricultural producers and food processors stand to gain a great deal from the increased

exports created by the agreement.

If DR-CAFTA is rejected, American farm exports will continue to face steep tariffs

on their exports. The average agricultural tariff applied to U.S. exports to these

countries exceeds 11 percent, and is much higher for key Nebraska products such

as beef (tariffs ranging from 15-30 percent), pork (15-47 percent), and corn (as high

as 45 percent). By contrast, over 99 percent of Central American and Dominican agricultural products already enter the U.S. market duty free. The U.S. currently has

a negative agricultural trade balance with the six DR-CAFTA nations for this very

reason.

The DR-CAFTA would open a new market of 44 million costumers to U.S. goods,

including Nebraska products. More than 80 percent of U.S. exports will gain immediately duty-free access to the DR-CAFTA countries, with remaining tariffs phasedout over 10 years.

The American Farm Bureau estimates that DR-CAFTA could expand U.S. farm

exports by $1.5 billion a year. This explains why more than 50 agricultural industry

and farm groups support passage of the DR-CAFTA. Nebraska’s manufacturers

would also benefit, especially in sectors like information technology products, construction and agricultural equipment, pharmaceuticals, and other specialty equipment.

Central America and the Dominican Republic comprise the second-largest U.S. export market in Latin America. With passage of the DR-CAFTA, the United States

will increase its global competitiveness—critical at a time that the U.S. is facing a

new competitive challenge from Asian imports.

I am also encouraged to learn that a recent study by the International Labor Organization (ILO) demonstrated that labor laws on the book in DR-CAFTA countries

are generally in line with ILO core labor standards. Moreover, this agreement contains ground-breaking environmental provisions, including a first-ever citizen participation process designed to correct trade-related environmental problems. Ten environmental non-governmental organizations from the region have endorsed the

trade agreement.

While trade is not the panacea for every economic woe, I believe that free trade,

combined the strong American work ethic, has provided the citizens of the United

States the highest standard of living in the world. I believe the DR-CAFTA will help

us continue our high standard of living, and boost America’s—and Nebraska’s—competitiveness in the global economy.

Thank you, Mr. Chairman. And I look forward to hearing from today’s witnesses.

PREPARED STATEMENT OF HON. MIKE ROGERS, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

Mr. Chairman, thank you for calling today’s hearing on the Central American

Free Trade Agreement. It is incredibly important for this committee to exercise its

trade jurisdiction.

Mr. Chairman free and fair trade helps American workers by opening foreign

markets and helps American consumers by lowering prices. However, for trade to

work, it must actually be free and fair trade. America has the strongest and most

diverse workforce in the world, and we should continue to knock down trade barriers to American products overseas.

The CAFTA does knock down trade barriers. As Ms. Vargo notes in her submitted

testimony, nearly 80 percent of imports from CAFTA nations already enter the

United States duty free. However, American made goods and services do not receive

equitable treatment from CAFTA nations. If we are to continue to manufacture in

18

America, we must stop allowing foreign governments to tax American made products out of the marketplace.

Even while we work to open new markets for American made goods, we must continue to address the actions of some of our so-called trading ‘‘partners.’’ For years,

American manufacturers have been able to stay ahead of foreign competition largely

because of their commitment to quality and innovation. However, that commitment

serves them little benefit when their own government is unable to protect American

innovations. Press reports of rampant foreign manufacturing piracy on everything

from brake pads to DVDs has made it clear that many of America’s trading partners

are not yet committed to enforcing the intellectual property laws they agree to when

signing trade agreements with the Unites States or as a condition of joining the

World Trade Organization.

Mr. Chairman, the threat of intellectual property theft and outright piracy is a

growing problem. For that reason, the House of Representatives has in past appropriations bills sought to increase funding help our trade enforcement officers enforce

trade agreements and international copyright law. I believe that our government is

sincere in its desire to carry this important fight forward. However, I am concerned

with how effectively we as a government and as a nation have actually waged this

battle. I hope that during their testimony and in replying to the questions posed

to them today’s witnesses can share with this committee the status of the United

States trade enforcement record, and how we can reasonably expect to enforce the

gains negotiated in the CAFTA.

Mr. STEARNS. We welcome the assistant U.S. trade representative for the Americas to the table. It is Ms. Regina K. Vargo, Office

of U.S. Trade Representative, for your opening statement. And I

would—just to clarify to all the members, we are here to learn and

to look at this agreement objectively and see the pros and cons.

And so obviously this morning you are the lead person. And so we

welcome you and we welcome your opening statement.

STATEMENT OF REGINA K. VARGO, ASSISTANT U.S. TRADE

REPRESENTATIVE FOR THE AMERICAS, OFFICE OF THE U.S.

TRADE REPRESENTATIVE

Ms. REGINA VARGO. Okay, thank you very much, Chairman

Stearns, Congresswoman Schakowsky, and members of the committee. I am pleased to have the opportunity to testify before you

today on the free trade agreement with Central America and the

Dominican Republic, or the CAFTA.

As the chief negotiator of this agreement, I would like to personally thank the subcommittee for focusing on the CAFTA today as

we begin the critical legislative process toward implementation of

this agreement. I hope I can answer any questions that you may

have regarding the many benefits that CAFTA will bring to U.S.

exporters, workers, farmers, ranchers, and consumers.

CAFTA marks the successful culmination of a decades-long

American policy of promoting economic reform and democracy in

Central America. CAFTA offers us the best opportunity to

strengthen the economic ties we already have with these nations

and to reinforce their progress toward economic, political, and social reform.

At the same time, we have much to gain from this agreement.

Collectively, Central America and the Dominican Republic make up

the second largest U.S. export market in Latin America with more

than $15.7 billion in U.S. exports in 2004. These countries form a

larger export market than Brazil and a larger export market than

Russia, India, and Indonesia combined.

The American Farm Bureau Federation estimates that CAFTA

could expand U.S. farm exports by $1.5 billion a year, which would

19

represent nearly a doubling of our current agricultural exports to

the region. Manufacturers would also benefit, especially in sectors

such as information technology products, agricultural and construction equipment, paper products, pharmaceuticals, and medical and

scientific equipment. The U.S. Chamber of Commerce estimates

that U.S. sales to the region would expand by more than $3 billion

in the first year of the CAFTA.

However, we currently face an unlevel playing field. The fact is,

we already have free trade with Central America and the Dominican Republic, but it is one-way free trade. Nearly 80 percent of industrial imports from Central America and the Dominican Republic

already enter the United States duty-free. In agriculture we estimate that 99 percent of Central America’s and the Dominican Republic’s farm exports to the United States are duty-free.

CAFTA will level the playing field for American workers and

farmers. It will further open regional markets to our products and

services, which currently face high-average tariffs and non-tariff

barriers.

More than 80 percent of U.S. exports of consumer and industrial

goods will become duty-free immediately under this agreement.

And more than half of current U.S. farm exports to Central America will become duty-free immediately, including high-quality cuts

of beef, cotton, wheat, soybeans, key fruits and vegetables, and

processed food products, among others.

U.S. farm products that will benefit from improved market access

include pork, dry beans, vegetable oil, poultry, rice, corn, and dairy

products. Every major U.S. farm commodity group but one—nearly

60 agricultural organizations—have stated their strong support for

CAFTA.

In services, the Dominican Republic and the Central American

countries will accord substantial market access across their entire

services regime offering new access in telecommunications, express

delivery, computer and related services, tourism, energy, transport,

construction and engineering, financial services, insurance, audiovisual and entertainment, professional, environmental, and other

sectors.

This is also a trade agreement for the digital age, providing

state-of-the-art protections and nondiscriminatory treatment for

digital products such as U.S. software, music, text, and videos. Protections for U.S. patents, trademarks, and trade secrets are

strengthened. And this agreement provides strong anti-corruption

measures in government contracting and other measures affecting

international trade and investment.

Textiles and apparel is an important component of our trade

with the region, which is our second largest market for U.S. fabric

and yarn. CAFTA represents a critical element in our domestic industry’s ability to compete with Asia. Without the tariff preferences

and rules of origins of CAFTA, apparel companies may well move

production to China, where they will be more likely to buy exports

from Asian suppliers, rather than from producers here in the

United States. A tee-shirt that is made in Honduras is likely to

contain well over 50 percent U.S. content, while a tee-shirt made

in China is likely to contain very little or no U.S. content. To keep

20

our customers for U.S. yarn and fabric and U.S. jobs in that sector,

we need to pass CAFTA soon.

I know that there is a considerable interest in the Congress with

regard to workers’ rights and labor standards in Central America

and the Dominican Republic. We share the goal of seeing the continuation of real, meaningful improvements in worker rights in the

region. In CAFTA, we focus on the chief problem in these countries,

the need to improve enforcement of domestic labor laws.

At the start of the negotiations, the Central American countries,

and later the Dominican Republic, requested a study by the International Labor Organization of the labor situation in these countries. The ILO study demonstrated that the labor laws on the books

in Central America and the Dominican Republic are generally in

line with ILO core labor standards. But let us be clear. The enforcement of labor laws in the region needs more attention and

more resources.

The Central Americans and the Dominicans themselves acknowledge this in a paper that they released recently that was produced

jointly with the Inter-American Development Bank and by the Central American trade ministers and labor ministers. It is a candid

assessment of past problems, recent improvements, and recommendations for further actions.

CAFTA is specifically designed to respond to the problem at hand

by improving enforcement and expanding resources with a comprehensive three-part strategy. First, the agreement requires that

countries not fail to effectively enforce their labor laws. As the New

York Times said in an editorial last November, ‘‘CAFTA actually

goes further than the pact with Jordan, since penalty fines collected for not enforcing labor laws would be sent back to the offending country to fix the offense.’’ And the use of those fines is subject

to agreement by the United States.

Second, the countries in the region have taken numerous concrete steps to improve labor law enforcement, including hiring more

labor inspectors, appointing special labor prosecutors, and prosecuting perpetrators of violence against trade unionists. We are

pleased that the labor and trade ministers recently announced a series of additional and specific recommendations to further improve

labor law enforcement.

Finally, we need to provide assistance to build the capacity of

these countries to enforce their laws more effectively and to

strengthen their enforcement institutions and infrastructure. The

Department of Labor and USAID have some important ongoing initiatives, but most notably, Congress has recently appropriated $20

million for fiscal year 2005 for labor and environmental trade capacity building. The administration intends to work with Congress

and with the CAFTA countries to target these funds toward the

areas of greatest need.

We have also broken new ground on the environmental side. The

CAFTA environmental provisions and the associated Environmental Cooperation Agreement are the most forward-leaning trade

and environmental package ever. We have included several innovations in the environment package. First, working with Senator

Baucus, we developed a new public submissions mechanism that

will allow the interested public, including NGO’s, an opportunity to

21

challenge a party’s failure to enforce its environmental laws and to

obtain an independent review of their submission. CAFTA is the

first trade agreement ever to include this kind of mechanism in its

core provisions.

Second, the parallel environmental cooperation agreement builds

on previous capacity-building efforts in the region but breaks them

down in several ways. For the first time ever, the agreement provides for the establishment of short-, mid-, and long-term benchmarks for measuring progress in meeting environmental goals and

also provides for independent monitoring by outside organizations

of success in meeting these benchmarks.

Finally, we are taking steps to ensure that capacity-building efforts are adequately funded. The administration is considering, as

I said, how to allocate the $20 million in funding for this fiscal

year.

Last month 10 Central American environmental NGO’s endorsed

the CAFTA and urged its passage. These groups praised the

CAFTA environmental package for the opportunities it provides to

them to have a new voice in pressing for environmental progress

in the region.

In closing, Mr. Chairman, the last 20 years have been a sometimes difficult road to democracy in this region. But today, we have

neighbors in Central America and the Dominican Republic who

want to trade goods, not guns, across their borders. We want to replace chaos with commerce and to use CAFTA as an important tool

of reform that will deepen and strengthen democracy.

Working closely with the Congress, we have negotiated a landmark free trade agreement. We believe CAFTA meets the objectives that Congress set in the Trade Act. It is strongly in the economic and national interests of the United States. We hope the

Congress will agree that America should not turn its back on struggling democracies that want a closer economic relationship that

will benefit citizens in all our countries. CAFTA makes eminent

sense for America and for Central America and the Dominican Republic. Thank you.

[The prepared statement of Regina K. Vargo follows:]

PREPARED STATEMENT OF REGINA VARGO, ASSISTANT UNITED STATES TRADE

REPRESENTATIVE FOR THE AMERICAS

INTRODUCTION

Chairman Stearns, Congresswoman Schakowsky, and Members of the Committee,

I am pleased to have the opportunity to testify before you today on the free trade

agreement with Central America and the Dominican Republic, or CAFTA. As the

chief negotiator of this agreement, I would like to personally thank the Subcommittee for focusing on the CAFTA today as we begin the critical legislative process toward implementation of this agreement. I hope that I can answer any questions you may have regarding the many benefits that CAFTA will bring to U.S. exporters, workers, farmers, ranchers and consumers.

I would like to begin today with a bit of historical context. Twenty years ago, Congress held several hearings on the topic of Central America. But the Administration

witnesses were not from USTR, and the topics had little to do with economics. In

February 1985, the House Foreign Affairs Committee held a hearing about developments in Guatemala, where an undemocratic military government ruled and civil

war raged. The following month, the House heard testimony from Pentagon and

State Department officials about U.S. military assistance to El Salvador, which was

then fighting an armed Communist insurgency. In 1985, to the extent that Congress

22

or the American people paid attention to Central America, it was largely because

of violence, dictatorships, and civil war.

It is an extraordinary sign of the progress made in Central America that we meet

here today—twenty years later—to discuss a free trade agreement—an economic

partnership with these countries. Today, the Dominican Republic and the nations

of Central America are all democracies. Elected leaders are embracing freedom and

economic reform, fighting corruption, strengthening the rule of law and battling

crime, and supporting America in the war on terrorism. And they want to help cement their courageous moves toward democracy and free markets by signing a free

trade agreement with their neighbor to the North, the United States.

CAFTA marks the successful culmination of a decades-long American policy of

promoting economic reform and democracy in Central America. President Bush

strongly believes that America should stand with those in our Hemisphere—and the

world—who stand for economic freedom. CAFTA offers us the best opportunity to

strengthen the economic ties we already have with these nations, and to reinforce

their progress toward economic, political and social reform.

But CAFTA is not an act of unilateral altruism on the part of the United States.

We have much to gain from this trade agreement: access to a large and growing

market of 45 million consumers close to our border, an opportunity to level the playing field for American workers and farmers who today must cope with one-way free

trade from Central America and the Dominican Republic without a reciprocal

chance to compete.

The agreement that we are here to consider today is the result of over three years

of hard work and close cooperation between the Administration and the Congress,

which began when President Bush announced his intent to negotiate a free trade

agreement with Central America in January 2002. Using guidance from Trade Promotion Authority, USTR formally consulted closely with committees of jurisdiction

before and after every round of negotiations, shared proposed text of the agreement

with staff and Members prior to presenting texts in the negotiations. Former USTR

Robert Zoellick, Acting USTR Peter Allgeier, myself, and other negotiators consulted

with the Congressional Oversight Group and with Members on an individual basis.

We took all views into consideration during each step of the negotiations, and greatly value the input provided by the Congress for this agreement. Our dialog with the

Congress continues today, and I welcome this opportunity to talk with all Members

about CAFTA.

In concluding this FTA, our objective, which we feel confident that we have met,

was to follow the negotiating objectives laid out by Congress in the bipartisan Trade

Act of 2002 to strike a comprehensive and commercially meaningful agreement that

will benefit U.S. workers, businesses, farmers, investors and consumers. At the

same time, these complex negotiations took careful consideration of import sensitivities of the United States, many of which were communicated to us by Members of

Congress. We worked hard to take into account all concerns raised with us by Members of Congress, and believe that we struck careful balances to reflect these interests.

So today I would like to discuss the reasons why we believe CAFTA is strongly

in the national interest of the United States, and why we want to work with Congress to pass this trade agreement into law.

SMALL COUNTRIES, BIG MARKETS

Central America and the Dominican Republic are very large export markets for

the United States. Collectively, these countries make up the second largest U.S. export market in Latin America, with more than $15.7 billion in U.S. exports in 2004.

For some key states, for example Florida and North Carolina, the region is a topthree export destination for Made-in-USA products. Central America and the Dominican Republic form a larger export market than Brazil, a larger export market

than Australia, and a larger export market than Russia, India and Indonesia combined.

While the Central America countries and the Dominican Republic are physically

small, they are clearly large markets for U.S. products and services. The American

Farm Bureau Federation estimates CAFTA could expand U.S. farm exports by $1.5

billion a year, which would represent nearly a doubling of our current agricultural

exports to the region. Manufacturers would also benefit, especially in sectors such

as information technology products, agricultural and construction equipment, paper

products, pharmaceuticals, and medical and scientific equipment. The U.S. Chamber

of Commerce has done a number of studies of the potential economic impact of

CAFTA in just eight key U.S. states, and estimates that U.S. sales to the region

would expand by more than $3 billion in the first year of CAFTA. From soft drinks

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to software, from pork to paper products, the region is a voracious consumer of U.S.

products and services. In some areas, textile yarn and fabric for example, the region

is second only to Mexico as a worldwide consumer of U.S. exports.

LEVELING THE PLAYING FIELD: NEW OPPORTUNITIES FOR U.S. WORKERS, FARMERS

But while these Central American countries and the Dominican Republic buy

many goods and services from the United States, we currently face an unlevel playing field. Most Americans probably do not realize that we already have free trade

with Central America and the Dominican Republic, but it is one-way free trade.

Under unilateral preference programs begun by President Reagan and expanded

under President Clinton with broad bipartisan support, nearly 80 percent of imports

from Central America and the Dominican Republic already enter the United States

duty-free. In agriculture, that percentage is even higher: we estimate that 99% of

Central America’s and the Dominican Republic’s farm exports to the United States

are duty-free. For the countries of the region, CAFTA will lock in those benefits and

expand on them, helping to promote U.S. investment in the region.

But more importantly, CAFTA will level the playing field for American workers

and farmers. It will further open regional markets to our products and services,

which currently face very high average tariffs or non-tariff barriers. For example,

today the average Central American applied tariff on motor vehicles is 11.1%, while

U.S. applied tariffs on imports from Central America are zero. The regional tariff

on steel averages 16.3%, but the U.S. tariff is zero. The regional tariff on chemicals

is 12.8%, but the U.S. tariff is zero. The same situation exists in agriculture: Central American and Dominican tariffs on U.S. vegetables faced a tariff ranging from

15% to 47%; ours are zero. U.S. fruits and nuts faced a tariff as high as 25% while—

products in this same sector enter our market duty free. The chief effect of CAFTA

is not to further open our market, but rather to tear down barriers to our products

and services in Central America and the Dominican Republic.

CAFTA will create new opportunities for U.S. workers and manufacturers. More

than 80 percent of U.S. exports of consumer and industrial goods will become dutyfree immediately, with remaining tariffs phased out over 10 years.

The agreement will also expand markets for U.S. farmers and ranchers. More

than half of current U.S. farm exports to Central America will become duty-free immediately, including high quality cuts of beef, cotton, wheat, soybeans, key fruits

and vegetables, and processed food products among others. Tariffs on most remaining U.S. farm products will be phased out within 15 years. U.S. farm products that

will benefit from improved market access include pork, dry beans, vegetable oil,

poultry, rice, corn, and dairy products. It is significant that every major U.S. farm

commodity group but one has stated its strong support for CAFTA.

In the important area of services, the Dominican Republic and the Central American countries will accord substantial market access across their entire services regime, offering new access in sectors such as telecommunications, express delivery,

computer and related services, tourism, energy, transport, construction and engineering, financial services, insurance, audio/visual and entertainment, professional,

environmental, and other sectors. The Dominican Republic and the Central American countries made significant commitments regarding their ‘‘dealer protection’’ regimes. These commitments will help ensure that U.S. firms are not locked into exclusive or uneconomical distributor arrangements.

This is also a trade agreement for the digital age, providing state-of-the-art protections and non-discriminatory treatment for digital products such as U.S. software, music, text, and videos. Protections for U.S. patents, trademarks and trade

secrets are strengthened, and several are Chile-plus provisions, such as strong patent protection by 2007 for certain modified plant varieties.

And this agreement breaks new ground, providing strong anti-corruption measures in government contracting and other matters affecting international trade or

investment. U.S. firms are guaranteed a fair and transparent process to sell goods

and services to a wide range of Central American and Dominican Republic government entities. The agreement’s dispute settlement mechanisms call for open public

hearings, public access to documents, and the opportunity for third parties to submit

views, with limited exceptions to protect confidential information. Transparency in

customs operations will aid express delivery shipments and will require more open

and public processes for customs rulings and administration.

TEXTILES

Textiles and apparel is an important component of our trade with the region and

deserves special mention. The Administration strongly believes that CAFTA is not

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a threat to U.S. textile producers but in fact represents a critical element in our

domestic industry’s ability to compete with Asia.

Today, garment factories in Central America and the Dominican Republic are very

large consumers of U.S.-made textile fabric and yarn. The extensive use of U.S. inputs in the regional apparel business means that Central America and the Dominican Republic actually constitute the second-largest world export market for U.S. textile yarn and fabric, behind only Mexico. For states like North Carolina, exports of

textile fabric and yarn to garment makers in the region make a small country like

Honduras that state’s number one export market in the world. CAFTA will help

keep it that way, by delivering tariff preference benefits for clothing made in the

region that uses U.S. yarn and fabric.

Without CAFTA, our domestic yarn and textile industry would likely lose one of

its biggest customers. Worldwide quotas on textiles and apparel expired at the end

of last year, meaning that the hemispheric industry faces a new collective threat

from Asia. Without the tariff preference benefits of CAFTA, apparel companies may

well move production to China. Indeed, the uncertainty to date about CAFTA has

already caused a number of apparel firms to shut down operations in Central America and move them to China; as many as 10,000 workers may already have already

lost their jobs. In China, there are no special trade incentives for apparel producers

to buy U.S. yarn and fabric. In fact, they are much more likely to buy inputs from

Asian suppliers, rather than producers here in the United States. That’s why a Tshirt that is Made in Honduras is likely to contain well over 50% U.S. content, while

a T-shirt Made in China is likely to contain very little U.S. content at all.

To keep our customers for U.S. yarn and fabric, we need to keep them close to

home. And to keep them close to home, we need to pass CAFTA soon.

LABOR

I know that there is considerable interest in Congress with regard to worker

rights and labor standards in Central America and the Dominican Republic. We

share that interest, and I believe we share the goal of seeing the continuation of

real, meaningful improvements in worker rights in the region. I believe we should

focus our strategy, and our attention and efforts, on the chief problem in these countries: the need to improve enforcement of domestic labor laws.

The Central American countries, and later the Dominican Republic, requested a

study by the International Labor Organization (ILO) of the labor situation in their

countries. The ILO study demonstrated that labor laws on the books in Central

America and the Dominican Republic, are generally in line with ILO core labor

standards. The Administration’s own, more detailed analysis of the labor rights situation in these six countries confirms that their labor laws are generally ILO-consistent. Indeed, labor protections on the books in the region are broadly similar to

labor laws in Morocco, and in some areas (e.g., child labor) are stronger. Congress

gave broad bipartisan support to an FTA with Morocco in 2004.

But let’s be clear: the enforcement of labor laws in the region needs more attention

and resources. Our analysis shows this, and the Central Americans and Dominicans

themselves acknowledge this, as the White Paper recently released by regional

Labor and Trade Ministers clearly demonstrates. CAFTA is specifically designed to

respond to the problem at hand by improving enforcement and expanding resources

with a comprehensive, three-part strategy:

• First, the agreement requires that countries not fail to effectively enforce their

labor laws. If they consistently fail to enforce those laws in a manner that affects our trade, then they face the prospect of monetary penalties that will be

directed to solve the problem, or potentially face the loss of preferential trade

benefits. As the New York Times said in an editorial on November 24, 2004,

‘‘Cafta actually goes further than the pact with Jordan, since penalty fines collected for not enforcing labor laws would be sent back to the offending country

to fix the offense.’’ Exactly right.

• Second, it’s important to note that countries in the region have already taken numerous, concrete steps to improve labor law enforcement, including hiring more

labor inspectors, appointing special labor prosecutors, prosecuting perpetrators

of violence against trade unionists, and cutting the backlog of cases in their

labor courts. There is much more to do, however. So we were pleased that Labor

and Trade Ministers recently announced a series of additional and specific recommendations to further improve labor law enforcement.

• Finally, we need to provide assistance to build the capacity of these countries to

enforce their laws more effectively and to strengthen their enforcement institutions and infrastructure. We’re pleased that the Department of Labor committed $7.7 million to a multi-year technical assistance effort. Congress has now

25

appropriated $20 million for FY05 for ‘‘labor cooperation, capacity building on

fundamental labor rights and the elimination of child labor, and improvement

in labor administration’’, as well as for important environmental cooperation activities in this region. The Administration intends to work with the Congress

and with the CAFTA countries to target these funds toward the areas of greatest need, and we hope that the funds provided for FY05 are only a first step

in an ongoing commitment by the Congress to fund labor capacity-building in

this region.

Our comprehensive strategy does not attempt to minimize the challenges we

faced: We negotiated a fully TPA-consistent labor chapter, we worked with the Dominican Republic and the Central American countries to make real worker rights

progress during the negotiations, and there is a strategy for long-term capacity

building. This concrete, real-world effort is directed at where the problem lies: problems with the enforcement of existing laws in Central America and the Dominican

Republic. By contrast, a strategy of defeating CAFTA would preserve the status quo,

and very likely set back progress to date. Defeating CAFTA will do nothing to improve working conditions for a single worker in Central America or the Dominican

Republic, and in fact will have the opposite effect, as tens of thousands of Central

Americans and Dominicans stand to lose their jobs to China if the United States

turns its back on CAFTA. We believe that one of the best ways to improve working

conditions in Central America and the Dominican Republic is to have strong economic growth, combined with a comprehensive and targeted strategy to build the

capacity of these countries to enforce their labor laws.

ENVIRONMENT

We have also broken new ground on the environment side. I believe that the

CAFTA environmental provisions, and the associated Environmental Cooperation

Agreement, are the most forward-leaning trade and environment package ever. We

have worked closely with Congress in developing our approach and developing many

of its unique features.

The CAFTA countries have come a long way in the last decade in putting in place

good environmental laws as well as the beginning of a complete environmental legal

regime, but enforcement in many cases remains a significant challenge. There is

also the need for greater transparency and involvement of civil society in environmental decision-making. To address these concerns, in addition to continuing existing Administration efforts to help the CAFTA countries further develop their legal

regimes, we have included several innovations in the environment package:

• First, we have developed a new public submissions mechanism that will allow the

interested public, including NGOs, an opportunity to challenge a Party’s failure

to enforce its environmental laws and to obtain an independent review of their

submissions. CAFTA is the first trade agreement ever to include this kind of

mechanism in its core provisions, and it will give civil society in the region a

new voice in working to improve environmental enforcement in the region. Just

a few weeks ago, in a ceremony taking place at the Organization of American

States, we and our Central American and Dominican Republic counterparts

signed a landmark agreement that designates a new environmental unit within

SIECA—the Organization for Central American Economic Integration—as the

secretariat to implement these provisions.

• Second, the parallel environmental cooperation agreement (also signed at the OAS

ceremony) builds on previous capacity-building efforts in the region, but breaks

new ground in several ways. For the first time ever, the agreement provides for

the establishment of short-, medium- and long-term benchmarks for measuring

progress in meeting environmental goals. The agreement also provides for independent monitoring by outside organizations of success in meeting these benchmarks. Initial priority areas for cooperation include reinforcing capacity to implement and enforce environmental laws, including habitat conservation, trade

in endangered species and treatment of hazardous wastes.

• Finally, we are taking steps to ensure that capacity building efforts are adequately funded. The Administration has initiated a Deputies process to oversee

environmental cooperation efforts linked with all the FTAs and to organize an

inter-agency budget process to promote coordination across interested federal

agencies. The Administration also is considering how to allocate the $20 million

in FY05 funding between labor and environment activities.

The response in the region is already gratifying. Last month ten Central American NGOs sent a letter to former U.S. Trade Representative Zoellick and the trade

ministers of our Central American and Dominican Republic partners, expressing

their support for the CAFTA and urging its passage. These groups praised the

26

CAFTA environmental package and the opportunities it provides for them to have

a new voice in pressing for environmental progress in the region. The governments

are also doing their part to prepare the way for CAFTA’s implementation. With our

participation, they have held numerous public outreach sessions in the region, with

more to follow. And just to take some of the most recent examples of concrete action:

Nicaragua has created a new office on trade and environment within its environment ministry as the result of the CAFTA, while El Salvador has established a new

advisory committee on trade and environment issues, with NGOs on the committee,

very much like our own Trade and Environment Policy Advisory Committee

(TEPAC). In fact, the Environment Chapter requires all of the CAFTA-DR countries

to establish such advisory committees.

Thus, we are poised to make a real difference in strengthening civil society and

environmental protection in Central America and the Dominican Republic. We

should not let this historic opportunity pass.

SUGAR: HANDLED WITH CARE

We are aware that some members of Congress have expressed concerns with U.S.

sectors that are sensitive to import competition, such as sugar. If I had to describe

in a phrase how we handled those issues in the agreement, it would be, ‘‘handled

with care.’’

On sugar, it is important to remember that there will be no change in the abovequota U.S. duty on sugar. This was an important accomplishment that recognizes

the sensitivity of this important sector of the U.S. farm economy. CAFTA will not

have a destabilizing effect on the U.S. sugar program, because even with a modest

increase under CAFTA, U.S. imports will still fall comfortably below levels set for

sugar imports in the Farm Bill.

In other agreements, we have also been sensitive to this issue. In our FTA with

Australia, sugar was excluded entirely. In our agreements with Chile and Morocco,

we have provisions that effectively will result in no change in the levels of sugar

imports from those nations.

For Central America and the Dominican Republic we agreed to a very small and

very limited expansion of the quota for sugar imports from these countries.

The total increased quota amount is equivalent to only about one day’s worth of

U.S. sugar production. We produce more than 7 million metric tons of sugar in the

United States annually. The increased amounts under CAFTA are only a little over

100,000 metric tons. Even after 15 years, increased sugar imports from Central

America and the Dominican Republic will amount to only about 1.7% of U.S. consumption.

In addition, the Agreement includes a mechanism that allows the United States,

at our option, to provide alternative compensation to CAFTA country exporters in

place of imports of sugar.

To put sugar imports under CAFTA into perspective, the increased imports in the

first year under CAFTA amount to about a teaspoon and half per week per American. That compares with average consumption of 10-20 teaspoons of added sugar

per day for most Americans. The amount of sugar allowed into the United States

under CAFTA is minuscule. Claims that the CAFTA will harm the U.S. sugar industry are simply wrong.

A UNIQUE CHANCE TO STRENGTHEN DEMOCRACY

Mr. Chairman, the last twenty years has been a sometimes difficult road to democracy in El Salvador, Guatemala, Nicaragua, and other countries in the region.

But today we have neighbors in Central America and the Dominican Republic who

want to trade goods, not guns, across their borders. They want to replace chaos with

commerce, and to use CAFTA as an important tool of reform that will help deepen

and strengthen democracy.

Working closely with the Congress, we have negotiated a landmark free trade

agreement that will open these large and growing markets to our goods and services. CAFTA will level the playing field, helping our workers and farmers sell to

countries that already enjoy virtually unlimited access to the United States market.

The agreement will help the U.S. textile industry unite with some of its largest

world customers to better compete against imports from China and other Asian competitors. It contains a focused, results-oriented strategy that will—when combined

with a strong Congressional commitment to capacity-building—produce real improvements in working conditions and environmental protection in the region. And

it handles sensitive commodities with great care.

We believe CAFTA meets the objectives set by Congress in the Trade Act. It is

strongly in the economic and national interests of the United States. We hope the

27

Congress will agree that America should not turn its back on struggling democracies

that want a closer economic relationship that will benefit workers in all our countries. CAFTA makes eminent sense for America, and for Central America and the

Dominican Republic.

Thank you.

Mr. STEARNS. I thank you. And I will start with the questions.

I certainly want to say that I think you made an eloquent case. We

normally allow 5 minutes for opening statements, and certainly we

wanted to give you extra time. Also to commend Rob Portman, who

is going to be the next trade representative, who we have great respect for. And out of respect for him and him talking to me, I sort

of felt that it was important for you to get your whole statement

on. And I think you did a very good job.

When you look at what you say and you—just from the outside,

and you say well, look, we are allowing these goods to come in here

now duty-free, I think you said 80 percent, and so by golly, all we

are going to do is allow now American goods to get in there without

tariffs. Why would anybody be against it? It just sounds so logical.

And the fact that you point out that you have had years. How long

have you been negotiating CAFTA would you say? I mean, I know

it is part of the CBI Agreement from the 1980’s, but I mean, how

would you——

Ms. REGINA VARGO. We spent a year, Mr. Chairman, on preparatory work, going over the kinds of obligations we like to see

in agreements with the countries. We were in a year of active negotiation with the Central American countries, and then another 3

months with the Dominican Republic.

Mr. STEARNS. So you have done the best effort; you had the most

comprehensive teams; you worked this out. You can’t expect it to

be perfect so people can hit you around the edges. But I think what

you are going to hear, people are going to go back to NAFTA. So

I think you are going to have to also be prepared this morning, this

afternoon, whatever time it is, to talk about NAFTA. And I think

the argument can be made that the NAFTA agreement provided

more wealth to Mexico. I think no matter who is on either side

would probably agree that that was true. The problem is that the

wealth was not proportional to the middle class or perhaps to the

lower-wage people. So that is what the people who are against this

agreement will argue, why should we vote for this CAFTA when we

have NAFTA where we saw yes, the wealth increased, but it did

not provide the wealth for the people who are in the middle class

or lower?

So the argument to you is, is it true that more wealth was provided for Mexico because of NAFTA? I think the answer is yes,

right?

Ms. REGINA VARGO. Yes, it is.

Mr. STEARNS. In your opinion, do you think the argument that

the wealth went to the upper 10 percent and not to the rest of Mexico is a valid argument at all? Can you make that statement with

some objectivity that the wealth that was created in Mexico went

to the upper people and not to the people themselves, the substantial working labor force?

Ms. REGINA VARGO. The discussion on NAFTA sometimes gets

complicated by——

Mr. STEARNS. Oh, I know——

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Ms. REGINA VARGO. [continuing] people——

Mr. STEARNS. [continuing] and that is—I am——

Ms. REGINA VARGO. No——

Mr. STEARNS. [continuing] trying to keep it very simple.

Ms. REGINA VARGO. No, I just wanted to say by the peso crisis

that happened——

Mr. STEARNS. Okay.

Ms. REGINA VARGO. [continuing] shortly after the——

Mr. STEARNS. Right.

Ms. REGINA VARGO. [continuing] agreement went into effect. But

in fact when you look at the period from before NAFTA to the current day, poverty rates are lower now, not greatly, but lower now

than they were then. And with respect to income levels, the World

Bank has found that the greatest reduction in poverty has been at

the extreme.

Mr. STEARNS. Okay, well, that is what you need to make, because, you know, as Members of Congress who voted for or against

it, you say well, how did NAFTA go? And if NAFTA went pretty

well, there is really no reason we shouldn’t pass this. So I think

on the stump you are going to have to explain that.

There is also a feeling that disagreement has broader implications than just the economic. It will allow Americans to have dutyfree commerce into Central America, but you alluded to the fact

that this will also help to stabilize countries and has geopolitical

considerations, not to mention the fact that you got these people to

agree, and if Congress turns it down, then we have got to go back

to these countries. And they say well, gee whiz, you had an agreement with Australia, you had agreement with all these other—Jordan, all these other countries. Why didn’t you have an agreement

in your own hemisphere? But you might talk to us a little bit about

not just the economic and the things you talked about, more inspectors, enforcement institutions, but is there also geopolitical reasons

for passing this agreement?

Ms. REGINA VARGO. Well, Mr. Chairman, there has been a strong

geopolitical reason for our interest in this region for quite some

time. And in fact that was the basis for which the Congress, in a

bipartisan way, passed the Caribbean Basin Initiative initially,

back around 1985 I believe it was, that provided them with oneway duty access into the United States. This was with the hope

that additional market access could help generate some sustainable

economic growth in the region that would be more beneficial to creating these—reinforcing these fledgling—what we wanted to be

fledgling democracies, and at the time was actually quite a period

of chaos in the region with their own internal civil wars, the guerillas fighting, et cetera.

What we built under CBI is we have been able to reinforce some

jobs and economic growth in the region through the opening we

made. The Congress found it was inefficient. Two years ago it went

to improve the terms of the CBI agreement to strengthen the partnership in the textile and apparel area. And I want to focus on that

for one moment if I can, because I think that it shows very clearly

what is at stake in this agreement with respect to your question,

Mr. Chairman.

29

On the basis of the partnership we formed, this region would buy

our fabric and our input, and they would produce the garments and

we would allow them duty-free into the United States on the basis

of their U.S. content. This region has built a broad apparel industry. That industry now employs half a million people. The people

employed in this industry in Central America are basically single

head of households. Basically, they are unwed mothers who are

supporting children. And a real, I think, risk in not passing the

CAFTA from a geopolitical standpoint is we need to reinforce that

partnership that we have had that has built this industry and created those jobs now that, under the WTO, the multi-fiber agreement is no longer in place, and only tariffs, no longer quotas, will

affect what the access is into the U.S. market. We have already

seen a strong push in the early months of this year from China and

other Asian countries, in some instances sending us as many goods

in the first couple months as they did in all of last year.

If, in fact, we don’t reinforce those jobs in Central America, this

industry, these countries will a) not be in a position to be buying

our inputs as they have been, so we will lose that business, but

they will also—they don’t have another means to pay for import

goods into their market. They are going to have to cut back on

what they are buying, buying from us generally. If they can sell us

$10 billion less, they can buy $10 billion less. But we are going to

do that in a context which you can see here by way of the possibility for a dangerous spiraling-down of economic opportunities in

the region. And I think that when you are in a situation as we are

in these countries where the rule of law and democracies are just

being put in place, having the potential of throwing a large number

of people out of work without other economic opportunities is definitely problematic for the United States.

Mr. STEARNS. My time is expiring. The ranking member, Ms.

Schakowsky.

Ms. SCHAKOWSKY. Thank you, Mr. Chairman. First, I would like

to ask unanimous consent to put into the record two documents

from the United States Conference of Catholic Bishops where they

urge us to evaluate CAFTA’s provisions in light of the moral criteria laid out in their joint statement, and two documents from a

broad environmental coalition of a number of organizations. And so

I would like——

Mr. STEARNS. By unanimous consent——

Ms. SCHAKOWSKY. [continuing] this in the record.

Mr. STEARNS. [continuing] so ordered.

Ms. SCHAKOWSKY. Thank you. Ms. Vargo, back in June of 2003

when CAFTA negotiating processes began, the USTR admitted the

serious problems with Central American labor laws and pledged to

take action to address those problems before duplicating the labor

rules of the Chile and Singapore FTA’s in CAFTA. Deputy USTR

Peter Allgeier testified before Congress that whether the labor provisions of the Chile and Singapore agreements would be sufficient

for Central America, this is from him, ‘‘depends in part on what

changes in their laws they make during the negotiating process.’’

He stated that ‘‘Frankly, the different circumstances that exist in

those countries and among those countries compared to, for example, Chile and Singapore’’ may require a different approach. And he

30

pledged that USTR would ‘‘need to get those labor standards and

the enforcement of labor rights up to a certain level before we

would find acceptable a commitment to enforce those laws.’’

Now, you know, you talked about capacity building, and those efforts may or may not come to fruition, and none of what you have

talked about is actually in the agreement itself. A year and a half

later most of the Central American countries really have done

nothing to bring their labor laws—I am talking what is on the

books right now—closer to international standards during the

CAFTA negotiations. The only country that partially reformed its

laws in response to ILO criticism is Nicaragua, but serious deficiencies remain in the laws even there.

So nonetheless, despite what the USTR representative said, the

CAFTA labor chapter is an exact replica of the Chile and Singapore

model. It requires only the enforcement of domestic labor laws, no

matter how inadequate those laws are. So this model was no acceptable to the USTR for Central America in 2003. Why should

Congress find it acceptable today?

Ms. REGINA VARGO. Well, thank you very much for that question,

Congresswoman, and actually, I welcome the opportunity to maybe

lend some insight to that remark. I think what Ambassador

Allgeier was signaling to the Congress in his testimony was that

we were aware of fairly widespread concerns with the labor situation in these countries. And in fact I would say that perhaps our

own initial preconception was that there would be difficulties with

their law reflecting the international ILO core labor standards.

Recognizing that this was going to be a major area of contention,

the labor ministers in the region, subsequent to Ambassador

Allgeier’s remarks, actually invited the ILO to come in and do a

study of their labor laws. And we believe that that study confirmed

that the laws on the books—the way they are captured in their

constitution and the way their ratification of the ILO core labor

conventions and some of the labor laws are set up—they do give

effect to these international ILO core labor standards and do provide a meaningful basis for a requirement in the agreement to effectively enforce their own labor laws.

Ms. SCHAKOWSKY. Even if what you said were the case, and we

will hear some other testimony, those nations could change labor

laws, and because they only have to enforce what their laws are,

couldn’t they weaken them at any point?

Ms. REGINA VARGO. We don’t see this as having much likelihood.

All of their direction has been in improving their labor laws, and

over the course of the last decade, most of these countries—Honduras is the exception and they are doing it right now—have undertaken labor law reform, utilizing technical assistance from the

ILO.

You also have to recognize that the way labor is presented in

their constitutions themselves present an important basis for how

they give effect to these international core labor standards.

Ms. SCHAKOWSKY. So you just think it is unlikely? My time has

actually expired. Thank you.

Mr. STEARNS. Thank you. Thank the gentlelady. Mr. Rogers.

Mr. ROGERS. Thank you, Mr. Chairman, and thank you, Ms.

Vargo, for attending today. It is important. I am an ardent free

31

trader and am encouraged to see some of the agreements that you

reached in CAFTA that I thought were I think a step in the right

direction.

I have one concern, and I think what you are saying here are

there are those here who aren’t going to be for trade no matter

what, and there are those who support trade no matter what. And

I think there is a kind of a coming together in the middle of those

of us who are concerned about the fact that the enforcement of the

USTR has, I can’t say, been a failure, but it has been abysmal at

best. And coming from a State like Michigan, we build cars, or we

are still trying to build cars in Michigan. We have found that it is

incredibly frustrating to try to work through the idea of, again,

people who supported these trade agreements worried about the

enforcement side of it. So help me walk through—I mean, intellectual property from brake pads to golf clubs to pharmaceuticals to

DVDs, horrible problem around the world. And I think, quite

frankly, you all have done a horrible job of stepping up to the plate.

Currency manipulation, killing us. Horrible job stepping up to the

plate.

And so our argument is, hey look, I want to be a free trader; I

want to be for trade agreements. But without an enforcement component in today’s global competitive environment, we are in trouble. And you need a referee on the field. If it is going to be a fair

game, there has got to be somebody there to throw the yellow flag

when somebody is cheating. And there are nations around the

world, some of which are engaged in these trade agreements, who

are cheating.

Even under NAFTA, if you look at the non-tariff trade barriers

under NAFTA, horrible job removing those trade barriers between

Mexico on agricultural products. I could give you a list a mile long.

A horrible job. And our argument is look, NAFTA, I think, at the

end of the day is a good thing and it is a powerful positive for the

United States and Mexico. But if you don’t remove those non-tariff

trade barriers through aggressive pursuit, we are going to be in

trouble.

And we are having a hard time selling CAFTA to people because

of that track record. And I believe that, you know, the best diplomat, the best program to cure poverty is really commerce. And

so we need to promote commerce, but we can’t do it one without

the other. So I hope you can help me understand, how are you

going to step up enforcement on CAFTA so we don’t run into these

very same problems that we are running into on other trade agreements?

Ms. REGINA VARGO. Thank you very much, Congressman. And I

couldn’t agree with you more about the importance of following up

on trade agreements on the enforcement angle. I do think that we

have been vigorous across a wide range of issues in pursuing enforcement initiatives. Sometimes, at an informal level, through consultations or a bilateral dialog, as opposed to WTO dispute settlement, but we have, I think, a record of achieving success in a number of large instances. But in particular I would like to point to

some of what I hear of your concern in the intellectual property

rights area, for example. We have a major mission right now that

is going to China and through Asia on our ‘‘Stop’’ initiative to adVerDate 11-MAY-2000 11:43 Aug 30, 2005 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 21632.TXT HCOM1 PsN: HCOM1
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dress counterfeiting and piracy. The administration recently indicated its increased concern with the currency situation.

But I would like to point out, because I hear it from this committee, about the idea of a lack of enforcement leading to the trade

deficit, only about 10 percent of the U.S. trade deficit is with countries with which we have free trade agreements. The bulk of our

trade deficit is with countries that we don’t—the vast bulk. So I

think these trade agreements represent an opportunity to put the

right kind of rules into place.

And you, sir, mentioned intellectual property. And certainly, that

is something in the CAFTA agreement where, across a whole host

of issues—whether that is protections for digital products, as I

mentioned earlier, strengthening trademarks, strengthening border

enforcement against counterfeited goods, strengthening patent and

copyright protections—we are bringing these countries into our

global efforts to produce good IP protections such as the UPOV

Convention on plants and animals or the Internet Copyright Treaties. This is a basis for bringing this region—because we are talking about this agreement for the moment if I can—up to those kind

of world-class standards that we would like to see. And we think

we are doing it in a way that couples it with some transitions in

a few areas and some trade capacity building assistance.

And frankly, I think there is a recognition on the part of these

countries that market access alone to the U.S. market hasn’t gotten

them the growth they need. They recognize that they need to put

in place a better commercial environment.

Mr. ROGERS. I appreciate that. What do you need from Congress

so that you can increase your enforcement and your effectiveness

in enforcement of these trade agreements? What don’t you have

that you need us to give you to be a success?

Ms. REGINA VARGO. Congressman, may I suggest that I get back

to you on that with a written answer——

Mr. ROGERS. I would love it.

Ms. REGINA VARGO. [continuing] because I think your question

isn’t just relating to my region. I think that you are addressing a

broader question for the agency as a whole.

Mr. ROGERS. True enough, but Mexico is a big problem, especially in the non-tariff trade side, and I would be happy to be supply you with all the information you need, at least from our angle.

Ms. REGINA VARGO. And we would be very happy to work with

you on the specific problems that you are particularly looking——

Mr. ROGERS. Right.

Ms. REGINA VARGO. [continuing] at.

Mr. ROGERS. Super.

Ms. REGINA VARGO. I will point out that under NAFTA, Mexico

did become our second largest agricultural export market.

Mr. ROGERS. Yes.

Ms. REGINA VARGO. So we are selling, but you are right, we

have——

Mr. ROGERS. Still problems, as you know. I am——

Ms. REGINA VARGO. Problems, yes, I do.

Mr. ROGERS. [continuing] sure you are aware.

Ms. REGINA VARGO. Thank you.

33

Mr. ROGERS. And we just need to be fair in all of those arguments. Now, that being said, I think it is important that we are

going to knock down a whole bunch of trade barriers in the Central

American region, pretty important. Hopefully, you can talk to me

a little bit about the tariffs on automobiles. Right now there is

about a 10-percent tariff on U.S. automobiles going to the region.

How will this agreement affect the selling of U.S. automobiles?

Ms. REGINA VARGO. Those tariffs will be down throughout the region within 10 years in Central America and within 5 years in the

Dominican Republic. One of the reasons for the slightly longer

phase-out on automobiles in the region is the role that they play

in their overall revenue structure. But our auto companies were

happy with that result. And obviously, that will give our cars a leg

up in this region.

Mr. ROGERS. Sure. So there is a definitive date when those tariffs

will be gone and we will have free and open access to selling cars

in——

Ms. REGINA VARGO. Absolutely.

Mr. ROGERS. Incredibly important. Well, again, I look forward to

working with you—and my time is almost up—on those issues. I

hope you take this strong message back, that I think that there are

many who are eager to support CAFTA but need some assurances

on the trade enforcement, not only for this agreement, but previous

agreements so that we can get the necessary folks in line to join

in on what I think is going to be a very important and positive

trade agreement, not only for Central America, but for the United

States of America.

Ms. REGINA VARGO. Thank you very much, Congressman.

Mr. STEARNS. I thank my colleague. For unanimous consent, request?

Ms. SCHAKOWSKY. Yes, thank you. I wanted to put into the

record a letter to Trade Representative Zoellick——

Mr. STEARNS. By unanimous consent, so ordered.

Ms. SCHAKOWSKY. Let me just say that I think response to what

you had said about the ILO report, the letter just says the characterization of the ILO report is inaccurate and constitutes a misuse

of the document. It says it better than I could, and I would like it

in the record. Thank you.

Mr. STEARNS. Gentleman from Ohio is recognized, Mr. Brown.

Mr. BROWN. Thank you, Mr. Chairman. Thank you very much,

Ms. Vargo. I just heard you say that countries where we have trade

agreements or most of our trade deficit is not that. I would like to

just show a chart that—this is one country we have a trade agreement with called NAFTA. We had a trade surplus the day NAFTA

was signed of a few billion dollars. We now have a trade deficit of

almost $50 billion. So I am not sure where you go with that.

A second point, when Ms. Schakowsky asserted that Central

American nations can weaken their labor and environmental laws

after CAFTA is implemented, your only answer to that was not to

prohibit that because you negotiated an agreement which decidedly

would not prohibit that, but you said that is unlikely because of

trends in Central America. I would just answer that with one story.

Before Guatemala and the Guatemalan legislature approved the

Central American Free Trade Agreement, the U.S. trade rep went

34

to their leaders and said unless you change your generic drug

law—on behalf, I assume, of the U.S. drug industry—we are not

going to include you in the Central American Free Trade Agreement. That was pretty well documented. So to say that American

business won’t go to any of these Central American countries or

Dominican Republic and lobby their parliaments and legislatures

to weaken labor laws is something that just stretches the imagination a bit.

Now, my questions are a couple of places I would like to briefly

go. First of all, speaking—if a company making jeans for export, a

large U.S. company or whoever, fires 500 workers in, say, Nicaragua because they tried to organize a union, the only penalty

under the Central American Free Trade Agreement is fines limited

to $15 million. The goods the company sells can still enter the U.S.

for sale duty-free. But if a street vendor is selling a pirated Mickey

Mouse DVD, the country in which that occurs faces trade sanctions, the DVD is seized and destroyed, and under CAFTA the offender is criminally liable for mere possession of a pirated good.

Does that mean we are putting more emphasis on intellectual property than we are on workers? Is that fair?

Ms. REGINA VARGO. Well, let me move through a number of

issues that you raised in your——

Mr. BROWN. Quickly, because we only get 5 minutes.

Ms. REGINA VARGO. Sure. Okay.

Mr. BROWN. And I have another question.

Ms. REGINA VARGO. Well, first of all, with respect to your earlier

comment, I would point out Mr. Rogers’ comment about enforcing

trade agreements, and that in fact the situation we have with the

DR with respect to data protection was one where, having recently

signed an agreement with that provision, the government passed a

law that overturned it. So I think I would put that in the category

of an enforcement action and would think in fact that the Congress

would be endorsing us for effectively enforcing these free trade

agreements.

With respect to the situation that you described for workers illegally fired for forming a union, I think all of these countries have

taken steps to make sure that they are applying the law in this

area better than they have in the past. The principal problem that

I——

Mr. BROWN. If I could interrupt, there is no guarantee in this

agreement that they will, because they can weaken their laws after

the Central American Free Trade Agreement is ratified. And you

have not told Ms. Schakowsky or me that the answer is no to that

so that they can—what you think they are doing now and you say

they are doing now doesn’t mean that will be their behavior in the

future.

Ms. REGINA VARGO. The ILO core labor principles that you are

referring to here are largely imbedded in their constitutions and

their ratifications of those treaties. I think the problem that you

are identifying, Mr. Brown, which is an important one, is the application of that law and the enforcement of that law. And when the

ILO did its study on this particular issue, what it found by and

large were problems of, for example——

Mr. BROWN. Okay, I am going to interrupt. I only have——

35

Ms. REGINA VARGO. Okay, you have 5 minutes——

Mr. BROWN. No, no, I know I am not going——

Ms. REGINA VARGO. Okay.

Mr. BROWN. [continuing] to get an answer to this, so I am going

to move to something else. And I don’t mean to be rude, but I know

what filibustering is in 5 minutes, so on this magic word—CAFTA

goes further than U.S. law in sheltering brand-name drug makers

from market competition. One example, CAFTA provides for two

forms of patent extension; the first one permits extensions on

delays in the examination process; the second one permits extensions based on delays in the drug-approval process. U.S. law places

some limits on patent extensions; CAFTA simply doesn’t. In the

U.S. the extension only applies to the active ingredient of a new

drug. It only permits the extension of the term of a single patent,

not multiple patents. That is a bill that I worked on with Senator

McCain a couple of years ago. Is it right that a Central American—

to subject patients in developing countries and these countries in

Central America to greater delays in access to generic drugs? Because under your negotiated CAFTA, patients in Central America

will be subjected to—will have less access to generic drugs than

they do in the United States because of the way that was negotiated. Is that fair?

Ms. REGINA VARGO. I don’t think that would be fair, nor, Congressman, do I think that is what the CAFTA does. The important

thing, and I will be fast here, is that the provisions in the agreement don’t require a change in law, and they are consistent with

U.S. law, which means the flexibilities that we have in U.S. law

with respect to the many different instances you just mentioned

would be available to the CAFTA countries as well. There is nothing in the agreement that prevents those countries from introducing those flexibilities into their own law.

Mr. BROWN. Except U.S. drug company lobbying, but that is a

whole other story. I would like to ask you if I could, Mr. Chairman—I will wrap up—if I send you a series of questions about patent law, if you would share your answers with us in writing?

Ms. REGINA VARGO. I would be happy to do that. Thank you very

much.

Mr. STEARNS. I thank the gentleman. Mr. Otter.

Mr. OTTER. Thank you, Mr. Chairman. I would like probably to

start off from the beginning with that question. If I send you a series of questions relative to the implementation and enforcement of

agreements in the Americas—and I assume that that means

NAFTA as well as the potential CAFTA agreement—would you

submit answers to those questions?

Ms. REGINA VARGO. I certainly would. I make that offer to anyone on the committee who would care to do that, and I would be

happy, Congressman, to come and talk to you about what you see

as implementation problems as well.

Mr. OTTER. Well, thank you for that. I am going to move away

a little bit from the specifics that some of my colleagues have

been—although I think they are terribly important, the environmental agreements, the labor agreement. I am going to move away

a little bit of those and go to more of your final statements relative

36

to the geopolitical necessity and importance of this. Do you believe

that these countries right now are free markets?

Ms. REGINA VARGO. These countries are trying to be free

markets——

Mr. OTTER. No, that isn’t what I asked. What I asked was do you

believe that they are right now free markets?

Ms. REGINA VARGO. Could I ask you to define what you mean by

that, sir?

Mr. OTTER. Well, let us say, you know, obviously with all the

government regulation in the United States, we hardly have a free

market either. But do you believe that the countries’ economies in

these countries, including the Dominican Republic where I have

spent some time, are free markets relative to the same kind of free

market that we struggle through in the United States?

Ms. REGINA VARGO. I believe these are market economies. I think

they have perhaps more barriers and more regulation than the

United States. And I think that there are many elements of this

agreement that will improve that situation dramatically.

Mr. OTTER. Your conclusion is that with this agreement, suddenly they are going to get this great aspiration for rule of law;

they are going to get this great aspiration for free economy and all

of a sudden develop into a strong democracy. Wasn’t that your conclusion?

Ms. REGINA VARGO. I think, sir, that what we find is that trade

agreements are attractive to these countries because it helps them

introduce reforms that they sometimes have trouble getting passed

more——

Mr. OTTER. Why is that?

Ms. REGINA VARGO. Because of the market access component to

them. And it is important for these countries to consolidate the access that they have here, to strengthen that textile and apparel

partnership we have——

Mr. OTTER. So in other words——

Ms. REGINA VARGO. [continuing] that is critical.

Mr. OTTER. So in other words—I am also limited to 5 minutes,

and most of that is gone. So in other words, if we engage in commerce between the United States and the CAFTA members, that

we will then impart some freedom and impart some free market

and engage in economic building, and then, as a result of that, we

will get this additional benefit of building a democracy and free

people and rule of law. Is that what you are saying?

Ms. REGINA VARGO. No, sir, in the sense that I think you described those as somehow sequentially with the reward coming at

the end of the process.

Mr. OTTER. Oh, it happens——

Ms. REGINA VARGO. This is a process of building and

reinforcing——

Mr. OTTER. It happens during——

Ms. REGINA VARGO. [continuing] that along the way.

Mr. OTTER. It happens during? Then why don’t we include Cuba

amongst this?

Ms. REGINA VARGO. I don’t think that there is the sense of the

Congress or the administration that there is a desire to do a free

trade agreement with Cuba. Actually——

37

Mr. OTTER. But now there is not a——

Ms. REGINA VARGO. —Congress asked us to do——

Mr. OTTER. [continuing] consensus in Congress for CAFTA either.

Ms. REGINA VARGO. The Congress actually asked us to move to

a free trade agreement with the countries of the Caribbean Basin

in their last renewal, the Caribbean Basin Act, to put that agreement, which is a one-way agreement, on a more reciprocal basis.

Mr. OTTER. Well, I would disagree with you because I think we

have got a history of trading with countries. And China is certainly

amongst those, isn’t it? Aren’t there other dictatorial countries that

we trade with, and the effort there is to build democracy? I am not

even going to ask you to respond to that. One of the problems that

I see—tell me whether you agree with this or not—is that we are

trying to build free markets, yet we are trying to do it politically

instead of economically. And that is why the USTR, your mission,

comes under the State Department instead of the Department of

Commerce, is that right?

Ms. REGINA VARGO. The USTR is actually part of the Executive

Office of the President. And I think we have a very strong economic

mission. I think that CAFTA is an instance where we have an excellent dovetailing of both our economic and our political—our geopolitical interests. And trade can help us introduce more stabilization, more jobs into this region which desperately needs them at a

time that they are struggling to move forward on rule of law.

The elements in the agreement as well, the transparency elements, the anticorruption elements, are all there to help formulate

how the government interacts with its private sector, with its business community—the sunshine elements on the environmental

side, the fact that dispute settlement under the agreement calls for

open hearings, amicus briefs, public documents. These are all elements of things that we like about the way we conduct our democracy and relate to our citizens that we incorporate in our trade

agreements. I think they are commercial; I think they have an important social and political element; I think they have a geopolitical

element.

Mr. OTTER. Thank you, Mr. Chairman.

Mr. STEARNS. I thank the gentleman. Mr. Gonzalez.

Mr. GONZALEZ. Thank you very much, Mr. Chairman. And first,

I need to apologize to Ms. Vargo for not keeping an appointment.

We were running behind. And obviously, even the individual that

I was meeting before your meeting, and, of course, you couldn’t

wait that long, was actually a member of the Congress from El Salvador, and I was just dying to ask you all sorts of questions.

But I want to—in the limited amount of time I have, let us see

if you can give me some clarification. Can you explain to me the

policy of guaranteed system of preferences?

Ms. REGINA VARGO. Yes——

Mr. GONZALEZ. When it comes to collective bargaining with the

labor movement and so on.

Ms. REGINA VARGO. GSP, the General System of Preferences, is

a unilateral preference program the U.S. Government has that covers a scope of products that is less than that which is covered

under the CBI program, but it has a number of criteria in it which

38

relate to a country’s eligibility for participation in the program.

One of those criteria relates to labor, and it is whether or not the

country is taking steps to provide for internationally recognized

core labor rights.

Mr. GONZALEZ. Okay. And presently, it is applicable to these particular countries that are the subject of the Dominican Republic—

CAFTA.

Ms. REGINA VARGO. Right.

Mr. GONZALEZ. All right. And so obviously you know where I am

going with this. My understanding is that all that will be done

away with, the applicability of what we refer to as GSP. And I will

have to read this because it is actually stated quite succinctly.

‘‘GSP allows for public workers’ rights petition based not just on

the failure to enforce labor laws, but on the adequacy of the laws

themselves under international standards.’’ So my question is,

what we presently have in CAFTA is a departure from those standards, and it actually weakens workers’ rights and the rights for collective bargaining in those respective countries?

Ms. REGINA VARGO. I am very glad you raised this issue, Mr.

Gonzalez, because it has been a matter of some debate as people

have talked about this agreement. I think there is no doubt that

the labor protections in the CAFTA agreement are more effective

in accomplishing the objective. GSP, as I mentioned, leaves full discretion to the administration on whether or not to take any action.

The criteria is whether they are taking steps in that direction, not

whether they have achieved it. It is not an absolute. Are they moving toward that? And if you look at how GSP has been applied to

this region itself—and I can use Guatemala as an example—we

had GSP investigations and ongoing cases from I think 1992 to

1997, across both Republican and Democratic administrations,

again in 2000 and 2003. Guatemala retains full use of its GSP

rights, in part because actually withdrawing those benefits from a

county and potentially throwing workers in the region out of work

is a sledgehammer. People are reluctant to go that far. But in the

CAFTA, the requirement will be to enforce their own labor laws,

and we think the ILO has made it clear that those labor laws do

promote and give effect to those international core labor rights.

If in fact the failure to enforce those laws is affecting our trade,

we can go in and we can, utilizing a dispute settlement process,

work with the country to agree on how to correct the problem, or

we can further implement fines to correct the problem. And those

fines are recurring fines. It is an annual fine that keeps being paid

until the problem is solved.

If, in that process, we find that we are dealing with a recalcitrant government, one that is not cooperating in a good way with

us, we have not ruled out the use of any tool to get them to fix the

problem, including the use of trade sanctions. So we retain all——

Mr. GONZALEZ. Available to you in the context of this agreement?

Ms. REGINA VARGO. Yes, so we retain all the tools that we have

ever had in GSP. And we have added, instead, the possibility here

of utilizing monetary fines because largely, these issues, we think,

are ones of resources and getting those resources directed to fixing

the problem.

39

Mr. GONZALEZ. If these labor practices in these particular countries come up short, what you are stating now is you have the

mechanism, the authority, and the power within the context of this

agreement to move forward, to correct, and to address those shortcomings?

Ms. REGINA VARGO. Yes, sir, we do.

Mr. GONZALEZ. Thank you very much.

Mr. STEARNS. Thank you, gentleman. Mr. Murphy.

Mr. MURPHY OF PENNSYLVANIA. Thank you, Mr. Chairman. I

want to look at a couple of things in comparison of NAFTA and

CAFTA and use that as a basis to try to understand what is happening now.

Now, in its analysis, USTR reported that agreement will have

minimal effect on U.S. employment, but a significant portion of our

current exports is to DR-CAFTA nations are components of products that are assembled by DR-CAFTA workers and re-imported

back to the U.S. I am wondering to what extent do you think this

agreement is going to support additional manufacturing work being

conducted by workers in DR-CAFTA nations? In other words, as

this goes on, are we going to be exporting more—the work will be

done down there and perhaps be brought back here for final assembly?

Ms. REGINA VARGO. Let me say that that may be a trend that

is happening in the world, but I don’t know of anything in particular about this agreement that would necessarily promote that

outcome. That outcome, in the way you suggested it, might be one

one would look at when you say well, look at the new access you

are offering back to the U.S. market. But I am very glad you returned to this point, Congressman, because CAFTA rhymes with

NAFTA, and maybe that is unfortunate for the discussion that is

going on here, but it starts from a fundamentally very different

premise. This Congress, in a bipartisan way, has already given

these countries virtually duty-free access to the U.S. market. So

what is new here is our ability to access their market.

Mr. MURPHY OF PENNSYLVANIA. So we did not have before with

Mexico—before NAFTA we did not have a situation where they

were importing things to our country duty-free?

Ms. REGINA VARGO. Not in the same way that the Central American countries already have.

Mr. MURPHY OF PENNSYLVANIA. And I know that part of the discussion here is one that says that if we don’t do this, someone else

will. If we don’t sell our goods to them, if they are not an open market, there will be other countries that will have that. And today we

recognize it is a competitive market that is increasingly competitive

every day.

But that being the case I do look at things about NAFTA. For

example, some electronic components—electronics were made in my

district, and in Mexico there is zero duties on them. In the United

States, when they are made here, there is like $45 per each item

on them. Now the head corporation says well, then, let us move

that manufacturing down to Mexico and pull them out of the

United States. So I look upon that as—even though NAFTA has

been around quite a while now, and one would hope that some of

the changes would have been made that allowed us to be competiVerDate 11-MAY-2000 11:43 Aug 30, 2005 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6602 21632.TXT HCOM1 PsN: HCOM1
40

tive. And so I look upon this—and I want to make sure there is

none of those glitches which continue to essentially favor the other

nation over ours when it comes to manufacturing goods and the

jobs that go with that.

Ms. REGINA VARGO. Well, let me address your first point, Congressman, those who say if we don’t do it, others will. I would note

right now just two products that were mentioned. There haven’t

been very many specific products mentioned here. French fries was

mentioned by the Congressman. Well, right now Canada, through

their free trade agreement, gets their French fries in duty-free to

Costa Rica. The Congresswoman from California mentioned a concern with fruits and vegetables, and yet Chile, right now, gets its

fruits and vegetables into this region duty-free. If we are looking

at this imbalance of trade that we have with this region, the fact

that—and I am using the fruits and vegetables example here—the

fact that they access our market duty-free and that we pay duties

going into that market, it is no new access to our market on fruits

and vegetables and is an example of a corrective mechanism in this

agreement, not one that is going to take a particular trend to make

it worse.

I think the same thing is true, sir, with respect to the manufacturing sector. First of all, a lot of what we sell into this region, we

compete with other countries. Maybe it is not even things they

produce. We compete with Europe, we compete with somebody else.

They do buy our capital goods, our tractors, our cars, our TVs,

whatever, and we would have a preferential access into this market

under this agreement.

There are only—on the industrial side because you are focused

on manufacturing—there are only two products or areas where

these countries do not have duty-free access to the U.S. market

today. One is canned tuna and the other is some rubber footwear

items. They have duty-free access to our market now on everything

else, sir. Every other manufactured good enters the United States

duty-free today.

Mr. MURPHY OF PENNSYLVANIA. And all those same goods, when

we sell to them, it does have a duty on it?

Ms. REGINA VARGO. Yes, sir. I can’t guarantee you every one of

them does, but I would say on areas of our major export interest,

things we tend to be very good at and look at as export priorities,

you will see that the tariffs are 5, 10, 15 percent.

Mr. MURPHY OF PENNSYLVANIA. Well, I would like to see some

analysis of some of those items showing us those comparisons. I

mean, similarly, Pennsylvania farmers and agriculture is our No.

1 industry in Pennsylvania. They are concerned about this and

they recognize the difference in the marketplace. But it would be

very helpful for us, and I hope you could submit some additional

information to the chairman on this, to look at how that goes.

But I know we are trying to predict the future here, and some

of this is opening markets in nations that are emerging and developing. And if that is the case, I mean, we need to have some sense

too what is happening both if we do this and what happens if we

don’t. And that would be, I think, valuable information for us to

have. But part of that analysis I would like to have you look at

what has happened with NAFTA in terms of what I hope were unVerDate 11-MAY-2000 11:43 Aug 30, 2005 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6602 21632.TXT HCOM1 PsN: HCOM1
41

intended consequences. But we still have some real unfair duties

when it comes to goods being made there versus here. And that is

having a negative impact upon particularly in some of the electronic industries in my district. And I hope that is something you

can give us some insight on as well.

Ms. REGINA VARGO. Thank you, Congressman. And I would like

to take the opportunity later to perhaps get an elaboration on that

point from you because I am not aware of duties that Mexico has

in the electronics area. So I would like to follow up to give you the

best possible answer.

Mr. MURPHY OF PENNSYLVANIA. Thank you very much. That is

all I have, Mr. Chairman.

Mr. STEARNS. I thank the gentleman. Mr. Strickland.

Mr. STRICKLAND. Thank you, Mr. Chairman. Ms. Vargo, I would

like to focus our attention on NAFTA’s Chapter 11 foreign investor

protections because these have created considerable bipartisan controversy. These allow foreign corporations to sue governments in

closed trade tribunals over public health and safety laws that foreign companies claim cost them lost profits, and they demand our

tax dollars in compensation. This sounds like a direct assault on

our U.S. sovereignty, so much so that there are some states—I believe Montana, Indiana, and Utah have passed legislation raising

these concerns. According to the CAFTA text as I understand it, in

these tribunals international law, not U.S. law, prevails. Is that

your understanding?

Ms. REGINA VARGO. Thank you, Congressman, for raising this

topic, which I think in the CAFTA agreement we have made very

many improvements.

Mr. STRICKLAND. But——

Ms. REGINA VARGO. No, it is——

Mr. STRICKLAND. [continuing] if you could just—I am sorry

for——

Ms. REGINA VARGO. No——

Mr. STRICKLAND. [continuing] interrupting——

Ms. REGINA VARGO. [continuing] we do not provide greater protection for foreign investors than for U.S. investors.

Mr. STRICKLAND. But in these tribunals does international law

prevail, not U.S. law?

Ms. REGINA VARGO. No, sir. The guidance that they follow is the

laws of the country that the allegation is being brought against.

But more specifically, let me point out to you this issue was raised;

we were asked to clarify the standard for expropriation, which was

done. The agreement specifically says that in the matter of, for example, environmental regulation by a State——

Mr. STRICKLAND. Whatever——

Ms. REGINA VARGO. [continuing] that——

Mr. STRICKLAND. [continuing] regulation.

Ms. REGINA VARGO. Whatever kind of regulation.

Mr. STRICKLAND. Yes.

Ms. REGINA VARGO. That if it is supplied in a nondiscriminatory

manner, that it is highly unlikely to constitute an indirect expropriation, and in defining what that highly unlikely circumstance

might be, the guidance the court uses is the Supreme Court ruling

in the Penn Central case, which is the seminal U.S. law on what

42

constitutes an indirect taking. And that, sir, is a new, novel element that is in the CAFTA——

Mr. STRICKLAND. Okay.

Ms. REGINA VARGO. [continuing] specifically to address the problem that you raise.

Mr. STRICKLAND. Okay, but since NAFTA, $35 million has been

ordered to be paid to foreign corporations by these secret tribunals.

My understanding is—and by the way, highly unlikely is not a sufficient standard for me, and I doubt if it is a sufficient standard

for my colleagues. We are talking about an international agreement, and I think the criteria should be tighter than highly unlikely.

It is my understanding that in these international tribunals, they

can order, you know, the U.S. tax dollars to be paid to a foreign

corporation. Now this is a question. It is also my understanding

that domestic companies would not have the right to use the

CAFTA investment protection rights or the CAFTA tribunals. Is

that right or am I mistaken?

Ms. REGINA VARGO. Our domestic companies could use these tribunals for investment claims that they were making against the

other governments to the agreement, not against the U.S. Government.

But, sir, may I for one moment—‘‘highly unlikely’’ I think was

my terminology. I think the exact wording is except in unusual circumstances. But the point there was that the law that is followed

is U.S. law in that case. The other clarification I would like to

make for you is that we made a change from the NAFTA and the

CAFTA in response, in particular, to the concern that you have

raised. And these international tribunals now are open to the public. The documents become public documents except for business

confidential, the practice that we have here in the United States.

And we now take amicus briefs from third parties who feel that

they have an interest in the case. These——

Mr. STRICKLAND. So are you——

Ms. REGINA VARGO. [continuing] were all criticisms leveled in the

past that we have sought to address in this agreement.

Mr. STRICKLAND. So are you telling me that under CAFTA domestic companies would have equal access to the CAFTA investment protection rights and the CAFTA tribunals, that they would

not have to use U.S. law or U.S. courts? And are you further telling

me that we are not giving foreign corporations greater rights than

that that would be available to United States corporations?

Ms. REGINA VARGO. Yes, sir. For domestic disputes with the U.S.

Government, our companies would utilize domestic courts. They

would utilize the system with respect to disputes they had with the

foreign governments. And we do not provide greater rights to foreign companies than we do to U.S. law and made a number of important clarifications in this agreement to ensure that that was the

case. That was part of our TPA instructions.

Mr. STRICKLAND. So just to make sure I understand, domestic

corporations would have the very same access to these tribunals

and to the protections that are available to the CAFTA countries,

as would our domestic companies?

43

Ms. REGINA VARGO. Our companies would be able to take the foreign governments of Central America and the Dominican Republic

to binding, international arbitration for investment disputes that

they had with them. I ask you to restate your question, sir.

Mr. STRICKLAND. Yes——

Mr. STEARNS. The gentleman’s time has expired, and we have

two other panels——

Mr. STRICKLAND. Okay, I——

Mr. STEARNS. [continuing] and I think your questions are certainly good and legitimate, and it might be possible that you could

put them in writing to her and she could reply.

Mr. STRICKLAND. I would be happy to do that, Mr. Chairman.

And thank you, Ms. Vargo.

Mr. STEARNS. And I thank the gentleman. The gentlelady from

Tennessee.

Ms. BLACKBURN. Thank you, Mr. Chairman, and I thank our

guest this morning for her time. I also want to thank the chairman

for his comments and concerns about NAFTA and the implementation of such, because that is a concern.

My district in Tennessee is one of those wonderful districts that

has had the opportunity to increase both the agricultural product

and the manufactured goods that they export. We have been very

pleased to see our exports rise, our product for export rise about

20 percent over the past decade.

But with that said, when we look at the agricultural component

of CAFTA, we are concerned. Cotton is important to us, soybeans

are important to us, vegetables, row crops, processed foods. All of

that plays into West Tennessee and our economy there. So while

we are pro-export and are very interested in CAFTA, we do have

some concerns. And much of that does center around cotton. And

I was pleased to hear your comments that you just made in your

opening statement and in one of your responses about the agreement should be there to benefit the participating countries. And I

liked hearing that because I agree with that statement and do hope

that CAFTA will benefit our State. And we are interested in the

yarn-forward rule and feel that that is going to be very important

for our Tennessee cotton growers.

And I would like to hear from you if you feel certain that this

agreement is going to continue the yarn-forward rule, because my

farmers are quite concerned about having cotton that is grown and

produced cheaply in China and having that routed through Central

America and then into the American market. So if you will please

address the yarn-forward rule.

Ms. REGINA VARGO. Thank you very much for your question because what we are doing in the textile and apparel area is just so

important. And the National Cotton Council supports this agreement. Not yet? I am going to take that back. I am anticipating that

they will support this agreement in part because two products that

you mentioned, ma’am, cottons and soybeans, have duty-free access

to the region on day one. The same is true for many of the fruits

and vegetables.

But going to the rule of origin for a moment, it is a rule of origin

that requires yarn-forward—that is the basis—but in terms of our

exports, $4 billion-worth of exports that the United States sells to

44

these countries today. There is a small—without getting technical—exception for Nicaragua, which I have heard some concern

expressed over that this will become a backdoor. I would note that

this is a small quantity; it is temporary in nature; it reflects trade

that already doesn’t meet the rule. We wanted to give Nicaragua

a little bit of time so that those plants didn’t move out of that country to another Central American country. That is why we made the

rule transitional. And we have very strong trans-shipment provisions and custom enforcement provisions in this agreement so that

we feel confident that this is a partnership that is going to work.

It is going to work for our yarn and fiber and for our cotton producers.

Ms. BLACKBURN. Okay, thank you. Let us shift a little bit in this

conversation. I want to talk about intellectual property because we

have the largest population of songwriters in the country live in my

Congressional district. And we are tremendously concerned about

intellectual property and the provisions that are there. And, you

know, when we look at this—when my folks that are in Nashville

and Franklin, and Middle, Tennessee, and some of them down in

Memphis start looking at these trade agreements, immediately

China and India and the production of the counterfeit DVDs and

CDs comes to mind. And Mr. Rogers asked you earlier what you

needed from us when you look at helping capacity bill and helping

get laws on the books in these other countries. And I hope you will

take that as not being an empty question or rhetoric. When you

hear us talk about intellectual property, this is a tremendously important economic development issue in my State. The theft of intellectual property and the piracy, the modern-day pirates that are

out there stealing this content from our producers, they are shameful. And I want to know what you are going to do, not what you

need.

But you have addressed in your opening statement—you have a

couple of paragraphs in here addressing intellectual property protection. But what are you going to do? How are you working with

these countries so that they have enforceable legislation on the

books? That they have got laws we can negotiate to so that we can

begin to clamp down on this piracy. That is the No. 1 question I

get from the folks in the creative industries, the creative class that

lives in my district. Well, that is great if they say they are going

to work on it, but what are they going to do? Actually give us some

quantifiable goals and some steps and some items that you are

going to have on that paper, and then what you are going to do to

enforce those if you will answer that one for me, please, ma’am.

Ms. REGINA VARGO. I would be happy to do that. We need stories

like this and it helps us make our case. And we would be happy

to send someone to meet with you or to put some of this in writing

as well. Let me just say that I think we have extremely strong protections here for the entertainment industry, and one of the things

that we look at before we actually let our agreements go into effect

is whether or not the countries have taken the steps in their own

laws to put these protections in place. So we will be doing that. I

was just alerted——

Ms. BLACKBURN. Ma’am, if I may interrupt you.

Ms. REGINA VARGO. Yes.

45

Ms. BLACKBURN. I see a lot of papers flying in front of you, and

so I know that they are providing you with some information on

that. I would ask that you do provide that to me in writing. This

is so crucial. We talk about wanting an economic renaissance in

this nation, but when you talk about the creative community that

lives in my district, whether they are entertainers or TV producers

or film producers or they are auto designers or they are working

in the biotech industry, these are folks whose intellectual property

is their stock in trade. And I want to be certain that we find ways

to protect this. It is vital to us. I think it is vital to our nation, not

just to the seventh district of Tennessee. So as all of this paper is

flying in front of you, I am going to request that in the interest of

time that you just submit that to us in writing so that we will have

that to use with our constituents. So thank you for your time, and,

Mr. Chairman——

Mr. STEARNS. And I thank the——

Ms. BLACKBURN. [continuing] I thank you.

Mr. STEARNS. [continuing] gentlelady. The gentlelady from North

Carolina, Ms. Myrick.

Ms. MYRICK. Thank you, Mr. Chairman. And thank you for being

here today. I come from a district that both has enjoyed a lot of

benefits from trade and has had a lot of problems because of trade.

I have always been a free trader myself in the concept, but I represent a very heavy textile area, and for years we have been going

through a lot of transition as you know. And so I know there is

some good things in this particular agreement, particular with our

yarn-forwarding provision, et cetera, the give-and-take back and

forth. The tee-shirt cap is going to be removed, which is a big help

also. And there are some other things. But I have to go back as

well to the enforcement issues, because that is where we have the

greatest difficulty in our area and in making people understand

any benefit from free trade because they are enforcing prior agreements. And, of course, in our case China is a huge part of that.

But on the trans-shipment side, I noticed you said that that was

one thing you were going to be careful of in these agreements. You

know, we have had a very frustrating experience with customs. Not

the people who are actually in customs are running that part of the

agency. They are just as frustrated as us. Customs was moved into

homeland security. And 2 years ago Congress authorized $9.5 million to hire 72 new agents strictly for customs trans-shipments because that was the biggest concern that we had. They have completely ignored that, shifted the money to something else. We are

having lots of fun getting answers out of them. And my point in

telling you that is it is not under your jurisdiction as USTR, and

I know that. And I know you work closely with Commerce on all

the issues, and we appreciate that. The safeguards for China, et

cetera, are very important to us.

But we have a hard time at home explaining why something simple like enforcement, in this particular case, isn’t being done. So

when you are trying to sell a trade agreement in North Carolina

and in my district, yes, in Charlotte where we are the second largest financial center, et cetera, wonderful; no problems. But then

when you go to our areas where we are heavy manufacturing and

textiles—and Mike Rogers and I are a lot alike in the way we think

46

about all this. It really is a challenge for us. And so I would just

encourage you that anything relative to this particular agreement

that you know can be done that is going to give strong enforcement

provisions would be helpful.

You know, we are very frustrated because—and China not playing by the rules of WTO. I know you are working on the currency

issue. But it isn’t happening fast enough, and that message has to

get to them to.

So, I mean, all of this, even though they are separate issues, they

aren’t separate issues for my district. One thing is into the other.

And any kind of help you can give relative to answers would be

much appreciated. It is really more a statement than a question,

Ms. Vargo.

Ms. REGINA VARGO. Well, I thank you very much, Congresswoman, for your interest. And you are right, obviously; the budget

of homeland security isn’t under us. But the terms in the agreement here will allow us to be much more effective monitoring in

terms of being able to get—when we get those customs people in,

take a look at that, they will be able to actually go in-country. We

can get our jump teams much more on the ground and much more

hands-on to make sure that we are not creating a leaky sieve into

the United States through these countries. They are going to be

good partners. And I take your other, larger enforcement question

on board as well. And we look forward to working with you on that

and any particular problems that you might wish to identify for

North Carolina.

Ms. MYRICK. I appreciate it. Thank you.

Mr. STEARNS. Well, and we thank you. We have completed and

we appreciate your patience here. And we think you are to be commended for participating. So now I think we will then move to

panel No. 2. So, Ms. Vargo, thank you very much.

Ms. REGINA VARGO. Thank you, Mr. Chairman. If I could just

make one comment back to Ms. Schakowsky for a moment——

Ms. SCHAKOWSKY. Yes.

Ms. REGINA VARGO. [continuing] that we did respond to the letter

that you have introduced into the record and we would like to

make—I would like to make sure that you have a copy of that response and perhaps that would be appropriate——

Mr. STEARNS. Sure.

Ms. REGINA VARGO. [continuing] in the record as well, Mr. Chairman.

Mr. STEARNS. By unanimous consent, so ordered, then.

Ms. REGINA VARGO. Thank you.

Mr. STEARNS. Okay. That would be great. All right. We have

Kevin Kearns, President of U.S. Business and Industry Council;

and Ms. Thea M. Lee, Chief International Economist, the AFL-CIO;

Mr. Calman J. Cohen, President, Emergency Committee for American Trade; and Mr. Frank Vargo, Vice President, International

Economic Affairs, National Association of Manufacturers. We appreciate you folks waiting through our first panel. And so we look

forward to your opening statements. And I would remind each of

you that it has been established that we give you each 5 minutes.

We allow you to run over a little bit, but if you could hopefully

keep it in that, we will keep the committee moving. And then we

47

have a third panel of four individuals that are waiting patiently

here too. So, Mr. Kearns, I think I will start on my left and start

with you with your opening statement, if you would be so kind.

Just turn the microphone on.

STATEMENTS OF KEVIN L. KEARNS, PRESIDENT OF U.S. BUSINESS AND INDUSTRY COUNCIL; THEA M. LEE, CHIEF INTERNATIONAL ECONOMIST, AFL-CIO; CALMAN J. COHEN, PRESIDENT, EMERGENCY COMMITTEE FOR AMERICAN TRADE;

AND FRANK VARGO, VICE PRESIDENT, INTERNATIONAL

ECONOMIC AFFAIRS, NATIONAL ASSOCIATION OF MANUFACTURERS

Mr. KEARNS. Thank you very much, Mr. Chairman. Also thank

you to the ranking member, Ms. Schakowsky, for the opportunity

to appear here today.

I am Kevin Kearns, President of the U.S. Business and Industry

Council. We are a national business advocacy organization, we

have been around since 1933, and we take a national interest approach to public policy questions. We represent businesses generally family owned and closely held businesses across the economic spectrum.

We are opposed to CAFTA. We were opposed to NAFTA. We

think that CAFTA will actually have four or five negative results.

It is shipment of more factories overseas, loss of U.S. jobs, lower

wages or suppression effect on wages for remaining workers in the

United States as they are pitted against Central American workers, more market access for China to the U.S. market through the

loopholes in the various provisions of the agreement.

If I could step back for 1 minute. I know we are focusing on

CAFTA, but let us look at the larger picture. And I think Congressman Brown tried to get at this somewhat with his chart. In 1993,

the last full year before NAFTA came in and then the Uruguay

Round, WTO, PNTR for China, CBI, various bilateral trade agreements, the U.S. had roughly a $68-billion trade deficit in goods and

services. Today it is—or at the end of last year it was $618 billion,

you know, nine or ten times what it was after 12 years of these

free-trade agreements. Our total exports of goods and services rose,

but our total imports rose much faster. Exports doubled, imports

tripled creating this massive trade deficit that we face today. U.S.

service surplus has continued to fall, was $48.5 billion last year.

And it is a significant decrease from where we were in 1993.

If you look at the trade deficit with China, I don’t think I have

to call attention to that, $124 billion the previous year, up $262 billion last year, growing tremendously. Even with Europe with the

decrease of the dollar versus the Euro, the trade deficit climbed by

$8.85 billion in 2004, a 12-percent increase. And our trade deficit

with Canada increased; our trade deficit with Mexico increased. I

think they are up—on the members of the committee mentioned

1,200-percent growth in NAFTA trade deficits over these last several years.

And the fact that we are losing ground, even with countries in

Europe where our dollar has depreciated, theoretically, we should

be gaining ground, but we are losing ground. And that I think is

48

the strongest signal that there are all these structural impediments

that these trade agreements have not gotten to.

I would submit, members of the committee, that if this were a

scientific experiment over the last 12 years, we would stop it, and

we would go back and examine our premises. If it were a poker

game, we would fold our hand and walk away from the table, pick

up the money we had left, and figure out a different strategy. And

if it were a clinical trial, we would be morally obligated to stop it

before there were anymore dead bodies on the floor.

We face a dollar crisis. We saw in the last few weeks remarks

by the Japanese prime minister and South Korean Ministry of Finance official that sent the currency markets into a tizzy. If the

Asian Central Banks stop buying dollars, the game is over. We

have had Federal Reserve Chairman Greenspan say our trade deficit is unsustainable on numerous occasions. We have had former

chairman Paul Volcker been talking about this for about 10 years.

Most recently I saw him on Charlie Rose television program. He

says, ‘‘It can’t go on indefinitely.’’ And we seem to think that somehow we can continue to run these trade deficits and just muddle

through.

And CAFTA is another one of these trade deficits. The gains pro- jected by CAFTA proponents are very modest, $1 billion perhaps in

manufactured goods, $1 billion in agriculture. I mean, essentially,

we are talking about peanuts. These are very poor countries. They

are under IMF Wastery agreements. Their population majority

makes under $2 a day. They are not going to be buying U.S. goods.

And the claim is made that well, this is what we need to compete

against China. We need CAFTA to compete against China.

Ms. Vargo misspoke. She said there were half a billion people in

the textile industry. It is half a million in Central America. And

she mentioned the fact that they are largely women. Well, I am

concerned about the U.S. textile and apparel industry where the

majority of the workers are women and minorities. I think that is

what the U.S. trade representative should be focusing on, American

workers. I think that is their job.

Do we want to support democracy in Central America? We do.

But do ranchers and farmers and textile workers, do they have to

give up their jobs to do that? I don’t think that is a fair equation.

The way to address the China problem is to address the China

problem, not to do it through CAFTA, not to give up more U.S. jobs

and factories to go to Central America looking for sort of a backdoor and have the Chinese continue to have a 40 percent undervalued currency, 15 percent export subsidy, free land and free

buildings, no or low-cost loans from State banks, you know, any

number of other government forms of subsidy and assistance.

So if we can’t ‘‘defeat’’ or compete with China after NAFTA,

which, of course, NAFTA was designed to do, we are certainly not

going to do it by aligning with six dirt-poor nations under IMF

Wastery agreements. You need a different strategy, Mr. Chairman.

The papers and the websites of the proponents of CAFTA, you look

at them and you can tell what the real game is.

Mr. STEARNS. Mr. Kearns, I am just going to have you sum up.

We are——

Mr. KEARNS. Yes, sir——

49

Mr. STEARNS. [continuing] going to try to keep things moving.

Mr. KEARNS. Okay. The real game is to get into a whole series

of other trade agreements, the Andean free trade to the Americas,

the Doha Round, to jumpstart all of these through CAFTA. All

these agreements, CAFTA is a signal. It is a green light. We are

going to continue down this policy. We need to stop, we need to

stop CAFTA, we need to stop digging this hole deeper. First rule

of holes, when you are in one, stop digging. Figure out a new strategy and get out. That is what this country needs. Thank you, Mr.

Chairman.

[The prepared statement of Kevin L. Kearns follows:]

PREPARED STATEMENT OF KEVIN L. KEARNS, PRESIDENT, U.S. BUSINESS & INDUSTRY

COUNCIL

Mr. Chairman and Members of the Committee: I would first like to thank the

Committee for allowing me the opportunity to express the many concerns of U.S.

domestic manufacturers and other small and medium-sized businesses regarding

CAFTA.My name is Kevin L. Kearns, President of the United States Business and

Industry Council.We are anational business advocacy organization, established in

1933, that takes a national interest approach to public policy issues.USBIC is not

a trade association, representing a single industry. Our members come from many

different sectors of the economy.

We represent companies that have made an outsized contribution to America’s national security and prosperity. We are a critical part of America’s domestic manufacturing base. Our enterprises support the broad middle class, one of America’s singular economic and political achievements. Today our companies in particular and

the nation’s middle class in general are under constant attack from predatory foreign trade practices.

Our companies still make most of their products in the United States, ensuring

that our revenues flow to American working families in the form of wages, to American productive facilities and R&D in the form of reinvestment in our businesses,

and to our local, state and national communities in the form of the taxes needed

to fund vital public services and our country’s security.

We are economically and socially critical to our communities. All of us are strong

believers in free enterprise. We are job creators. We are productivity drivers. We

are technology pioneers. But now, our very existence and ability to create these benefits is being threatened by decades of trade policies that ignore reality and in fact

seem designed to close us down.

Although we are promised that CAFTA will open big new foreign markets for

U.S.-made goods, the opposite is clearly true. The results of the outsourcing deals

that have dominated U.S. trade policy over the last twelve years are in: gargantuan

trade deficits, shuttered factories, and formerly middle-class Americans sliding down

the job and wage scales. CAFTA is simply the latest in this series of outsourcing

deals that are gutting our domestic manufacturing base.

The six other CAFTA signatories are manifestly too small, too poor, and often too

indebted to become significant consumer markets for U.S. exports. Their only attraction is to multinational corporations, which see them as low-cost bases for supplying

the U.S. market, and as levers to force companies and industries like ours to compete on price rather than on quality and innovation. This is a no-win proposition

for domestic manufacturing and for the nation as a whole.

As a result, CAFTA’s passage will surely increase net U.S. imports, boost the already dangerously high trade deficit, further weaken the dollar, force the continued

fire sale of American assets, and reduce domestic manufacturing output, employment, and technological innovation.

New trade agreements could strengthen domestic manufacturing, but only as part

of a thorough overhaul of U.S. trade policy aimed at promoting domestic production

and living standards. Absent new approaches for dealing with challenges such as

China’s many predatory trade practices, the widespread foreign subsidization of

manufacturing, and a deeply flawed set of world trade rules, CAFTA’s passage will

simply further open America’s market to imports without producing comparable export opportunities.

Passage of CAFTA will also stand as a major obstacle to effecting urgently needed

alternatives to the failed free trade model that is destroying domestic American

manufacturing and the wider economy. CAFTA will become a political bridge to

50

even more destructive trade deals that are lined up behind it and that the multinationals and retailers are pushing to complete.

Here are the chief problems with CAFTA:

There is not a Central American Market for U.S. Exports—Simply put,

CAFTA is an outsourcing agreement. The trade agreement involves the countries of

Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic. These six small countries simply cannot serve as net consumers of U.S. exports, and so CAFTA will only lead to a worsening of the current U.S. trade deficit—

as have all of the trade agreements of the last 12 years.

As previously reported by USBIC, these six countries have a collective gross do- mestic product (GDP) of $85 billion. By comparison, New Haven, Connecticut has

a GDP of $80 billion. Tampa-St. Petersburg has an $87 billion GDP. The proCAFTA lobby acknowledges that ‘‘millions live on less than $2 a day.’’

Moreover, Nicaragua, Honduras, Costa Rica, and the Dominican Republic are already under International Monetary Fund (IMF) austerity agreements as a result

of their large foreign debt and deep poverty. For example, the Dominican Republic

has $7.6 billion in foreign debt, 2002 inflation topped 43 percent, and the poverty

rate is 67 percent. As a result, CAFTA can only lock the United States into a trade

relationship with countries that can only be net exporters to America, and that will

increase the already dangerously large U.S. trade deficit.

CAFTA is an Outsourcing Agreement—Pro-CAFTA lobbyists like to portray

the Central American countries as a huge market for U.S. exports, even surpassing

Brazil and Australia. Instead, CAFTA is largely a market for U.S. ‘‘turnaround’’ exports—products shipped south for assembly and then final sale in the U.S.—particularly textiles and semiconductors. 35 percent of the modest $15 billion in exports

to CAFTA countries are ‘‘turnaround exports,’’ which increased by $1.36 billion from

1997-2004.

‘‘Turnaround’’ exports simply represent outsourcing that supplants U.S. production and employment for cheap overseas labor, and drives down U.S. living standards. Due to Central American turnaround trade, the U.S. trade deficit with the

CAFTA-6 rose nearly 60 percent from 1997-2004, and was $2.4 billion in 2004.

CAFTA Is Poorly Negotiated and Allows Chinese Textile Transshipments—Already, 75 percent of Central American exports to the United States

are duty-free, including 99.9 percent of food and agricultural products. As of 2001,

70 percent of U.S. industrial exports had zero-duty access to the Central American

market. CAFTA will only increase that percentage to 80 percent.

CAFTA claims to benefit U.S.-based fabric manufacturers by requiring the use of

American-made fabrics in foreign garment production. This is called ‘‘yarn forward.’’

However, CAFTA includes a number of loopholes to undermine this. One, the Yarn

Forward provisions of the agreement cover only the ‘‘essential fabric’’ in a garment,

and leave out much non-visible material.Two, due to ‘‘single transformation’’ exceptions, components of such products as bras and sleepwear, for example, can be imported duty-free into the United States in unlimited quantities even when made entirely outside the CAFTA region, in China for example.

Another problem is the ‘‘cumulation’’ provisions of CAFTA, which allow duty-free

entry into the United States of any apparel or related products made entirely of fabric components from any country party to a free trade agreement with any CAFTA

signatory. Thus, non-American denim, wool, cotton, and man-made fibers produced

in Mexico can be sent to CAFTA countries for assembly into garments that can then

be shipped duty free into the United States.This provision simply rewards textile

firms that have already moved from the United States to Mexico under NAFTA.But

it’s also a major loophole to benefit China.

Why is that so? Because Mexico has long been a hotspot for illegal textile transshipments from China. According to the Mexican Textile Chamber of Commerce,

58% of all clothing sold in Mexico is smuggled in from China. It seems that China,

which is not a party to this negotiation and has given up nothing in return, stands

to gain substantially from CAFTA.

Even the totally inadequate limits on non-CAFTA materials and products eligible

for duty-free treatment can only be maintained with satisfactory customs enforcement throughout the CAFTA regions and throughout the economies of any free

trade partners. No serious observer of the trade scene considers U.S. Customs enforcement to be remotely adequate, and no significant budget resources for this mission are anywhere in sight. Much worse, of course, is the customs situation in our

prospective CAFTA partners and other free trade partners like Mexico. And significant improvement in these countries’ customs systems is a prospect even more remote than in the United States.

Additionally, we also must not ignore the determination of China and other Asian

textiles and apparel producers to maintain and increase market share through

51

whatever means necessary. The Chinese government has put into effect a wide

range of industrial subsidies aimed at maintaining and increasing exports—especially to its leading market, the United States. However, the United States has so

far displayed absolutely no willingness to respond to the Chinese and the Asian subsidies.

CAFTA Sets a Precedent to Eliminate All ‘‘Buy American’’ Provisions and

Open US Government Procurement to Foreign Countries—Perhaps the most

disturbing loophole in the CAFTA agreement is one that most people have never

even heard.According to the U.S. Trade Representative’s official summary of the

agreement, chapter nine of CAFTA establishes a basic rule of ‘‘national treatment’’

in government procurement.This means that each nation must treat goods, services,

and suppliers from the other CAFTA parties in a manner that is ‘‘no less favorable’’

than domestic firms when awarding government contracts.In simple terms, that

means governments cannot treat their own citizens better than foreigners, or use

‘‘buy domestic’’ policies to support their own economies. And so, at a time when the

U.S. is rapidly outsourcing both its service and manufacturing jobs, CAFTA will

make it illegal for any state or federal agency to adopt a ‘‘Buy American’’ policy.

CAFTA Will Exacerbate the Devastating Impact of NAFTA and CBI—From

1997-2002, U.S. domestic manufacturers’ share of the U.S. market fell from 77.4%

to 72.5%, despite an 18 percent gain in productivity. During that same period, U.S.

exports fell by $9.6 billion and the U.S. lost 2.3 million manufacturing jobs. Moreover, CAFTA will continue momentum for further bad trade agreements that risk

crashing the dollar and igniting a global financial crisis that will take years to work

through.

In conclusion, USBIC’s members can assure you that without dramatic policy

changes, many more domestic manufacturers will soon be forced to close down. That

means these companies will no longer be engines of economic growth or pillars of

community stability. Our employees will go from taxpayers to consumers of government revenues—in unemployment insurance, retraining, food stamps, Medicaid, and

other forms of government assistance. Pressures to enlarge the welfare state, with

the concomitant redistribution of our society’s wealth, will grow significantly stronger

To remain a true global economic and military superpower, and a prosperous, stable society, the United States urgently needs entirely new trade policies that support domestic manufacturing and its resultant stable communities. Defeating

CAFTA is the place to start.

Mr. STEARNS. Thank you. Ms. Lee, welcome.

Ms. LEE. Thank you, Mr. Chairman.

Mr. STEARNS. I think you have to turn your mike on.

STATEMENT OF THEA M. LEE

Ms. LEE. Thank you very much, Mr. Chairman, Congresswoman

Schakowsky, members of the committee. I really appreciate the opportunity to come today and testify on behalf of the 13 million

working men and women of the AFL-CIO on this extremely important issue. I think you all know how important trade policy is to

our members, but the DR-CAFTA, the Central American Free

Trade Agreement I think is a pivotal policy debate and one that is

very important.

In our view CAFTA provides precisely the wrong answers to the

challenges faced both in Central America and the United States. It

is a failed model that will likely exacerbate poverty and inequality

in Central America while further eroding good jobs and wages at

home. At the same time, its successive protections for multinational corporations will undermine the ability of elected governments to protect public health, strong communities, and the environment.

American workers and unions are not opposed to trade. We believe that trade has the potential to lift people out of poverty, to

increase harmonious relations between nations, but we also believe

absolutely that the rules must adequately balance competing interVerDate 11-MAY-2000 11:43 Aug 30, 2005 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6602 21632.TXT HCOM1 PsN: HCOM1
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ests and protect, in particular, the most vulnerable members of society: workers, family farmers, subsistence farmers, those needing

affordable, life-saving medications. And in our view U.S. trade policy has simply not found that balance. We didn’t find it in NAFTA,

we didn’t find it in China’s succession to the WTO, and we certainly haven’t found it in CAFTA. And instead of protecting the

most vulnerable and making sure that we have put, as Congresswoman Schakowsky said, protection of workers’ rights, the environment, democracy at the very center of our trade agreements, we

have put them on the last page.

The key question facing us is not just whether CAFTA is an okay

agreement, a good enough agreement, but whether it actually sets

us back. And I would like to argue today that it is not just that

CAFTA is a disappointment, but that it actually, in some key ways,

is worse than the status quo, particularly with respect to workers’

right.

But I also wanted to just briefly say, in terms of U.S. competitiveness and good jobs, like Kevin, like many of you, like many of

the statements that were made earlier today, we have heard—the

labor movement, American workers, my members have heard over

and over again that every new trade agreement is about opening

markets and selling more stuff. Just as Ms. Vargo said, we are

going to open up Central America’s markets, lower their tariffs,

and American products will have a better chance of being sold

there. This is the exact same argument we had in NAFTA.

And I actually wanted to correct one of the things that Ms. Vargo

said. She said that it is an entirely different situation because Central America’s market is already open to U.S. products and Mexico’s wasn’t. In fact before NAFTA, U.S. products going into Mexico

faced a somewhat lower average tariff than U.S. products today

going into Central America on average, just given the mix of

things. And I can provide those precise numbers for you if you are

interested.

But with China PNTR, this is actually the most extreme situation where in fact China didn’t change their tariffs at all—U.S.

didn’t change our tariffs at all. China lowered its tariffs, and yet,

still our trade deficit with China doubled because the point is,

these trade agreements are not about selling more products, exporting more goods from the United States, but are about facilitating outsourcing and off-shoring of U.S. jobs. And that is why

they never deliver the benefits in terms of U.S. jobs and market access and competitiveness that they are claim to.

In terms of workers’ rights it is very simple. And I am glad Mr.

Gonzalez is here because I think his question deserved a better answer than he got from Ms. Vargo. Under current U.S. trade agreements, the GSP and the CBI, the U.S. can in fact challenge inadequate labor laws in Central America. Under CAFTA we cannot.

The GSP, CBI does allow the removal of trade benefits when countries are out of compliance. CAFTA only allows trade sanctions if

a country fails to pay a fine to itself. This is a very, very different

situation. I know both Mr. Brown and Ms. Schakowsky raised this

issue. The only enforceable issue in CAFTA with respect to workers’ rights is that countries enforce their own labor laws.

53

Now, Ms. Vargo said that it is unlikely in her view that countries

would weaken their labor laws. Now, when we negotiate trade

agreements, we do not negotiate them for the most likely scenario,

we don’t negotiate them for the best-case scenario, we don’t negotiate them assuming that our trade partners behave themselves in

areas that are of key importance to us. We negotiate language that

needs to be airtight. And the trade agreements are in place not for

5 years, not for 8 years, but for 50 years, 100 years, for future governments that we haven’t seen yet. We don’t know whether those

governments will in fact weaken their laws.

And in fact right today in Guatemala, the government is in fact

making efforts to weaken their labor laws in ways that are in violation of the commitment to meet ILO standards. So this is not a hypothetical situation. This is a very real situation. We are giving

permanent and deeper market access to the Central American

countries, and we are weakening the labor rights conditions attached to that.

And this is of key importance to Central American workers. We

have worked very closely with Central American unions and worker activists who have told us they want the stronger worker rights

protections that they have today under GSP. Now those aren’t perfect. If they were perfect, then Central America would be a workers’ paradise today. But it is one little piece of leverage that we

have today, and as we open our market, we are in fact gutting the

workers’ rights protection. And this is too important an issue, both

for American workers and for Central American workers to overlook.

And I thank you very much for your time, and I look forward to

your questions.

[The prepared statement of Thea M. Lee follows:]

PREPARED STATEMENT OF THEA M. LEE, CHIEF INTERNATIONAL ECONOMIST,

AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS

Mr. Chairman and members of the subcommittee, thank you for the opportunity

to testify today on behalf of the thirteen million working men and women represented by the AFL-CIO. U.S. trade policy in general, and DR-CAFTA in particular, are of enormous interest and importance to our members and to America’s

workers.

In our view, CAFTA provides precisely the wrong answers to the challenges faced

in Central America and the United States. CAFTA represents a failed model that

will likely exacerbate poverty and inequality in Central America, while further eroding good jobs and wages at home. At the same time, its excessive protections for

multinational corporations will undermine the ability of governments to protect public health, strong communities, and the environment.

Mr. Chairman, members of the subcommittee, we ask you to reject CAFTA and

urge the administration to renegotiate this deeply flawed deal.

Any vote on CAFTA must take into account the broader economic reality that we

are facing today. Our trade deficit hit a record-shattering $617 billion last year, we

have lost close to three million manufacturing jobs in the last four years, and average wages have not kept pace with inflation this year—despite healthy productivity

growth. Offshore outsourcing of white-collar jobs is increasingly impacting highly

educated, highly skilled workers—leading to rising unemployment rates for engineers and college graduates. Together, record trade and budget deficits,

unsustainable levels of consumer debt, and stagnant wages paint a picture of an

economy living beyond its means, dangerously unstable in a volatile global environment.

Some CAFTA proponents have argued that opening Central America’s markets to

U.S. goods will boost sales for U.S. producers, creating high-paying export-related

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1Kate Bronfenbrenner, ‘‘The Effects of Plant Closing or Threat of Plant Closing on the Right

of Workers to Organize,’’ Dallas, Texas: North American Commission for Labor Cooperation;

1997. Kate Bronfenbrenner, ‘‘Uneasy Terrain: The Impact of Capital Mobility On Workers,

Wages, and Union Organizing,’’ Commissioned research paper for the U.S. Trade Deficit Review

Commission; 2000.

icit and allow U.S. companies to compete more effectively with China and other

countries.

However, our experience under NAFTA demonstrates that the opposite is likely

to occur. As Republican Senator Olympia Snowe said recently in the Senate Finance

Committee hearing on CAFTA, NAFTA has cost U.S. workers nearly one million

jobs and job opportunities (based on the deterioration in our trade balance with our

NAFTA partners).

NAFTA was also supposed to open markets for American goods and services, creating high-paying jobs at home and prosperity abroad. Instead, in eleven years, the

U.S. trade deficit with Canada and Mexico ballooned to twelve times its pre-NAFTA

size, reaching $111 billion in 2004. Imports from our NAFTA partners grew more

than $100 billion faster than our exports to them, displacing workers in industries

as diverse as aircraft, autos, apparel, and consumer electronics. This occurred because U.S. companies did not take advantage of the easier access to the Mexican

market to export finished consumer goods to Mexico; instead, they shifted production out of the United States to Mexico, exporting parts and capital goods and importing finished products. The net impact of these production shifts was a loss of

good jobs in the United States.

Those workers whose jobs were not eliminated also suffered. Employers used the

leverage of their new mobility and rights under NAFTA to crush union organizing

drives and win concessions at the bargaining table, driving down wages and working conditions for American workers. According to researchers at Cornell University,

the incidence of employers’ threats to close and relocate factories grew under

NAFTA. And these intimidation tactics are very effective: workers are half as likely

to succeed in organizing a union when their employers threaten to move jobs

abroad.1

NAFTA simply did not deliver stronger net exports or a competitive advantage for

U.S.-based companies and workers, and there is little reason to believe that CAFTA

will be any different. Like NAFTA, the attraction of Central America for multinational corporations is not its consumer market, but its low-paid and very vulnerable workforce.

The incremental market access for U.S. producers under CAFTA is quite small,

as the consumer markets in the DR-CAFTA countries are not very significant. Many

U.S. exports to the region are intermediate inputs, which are assembled in the region and then exported back to the United States.

And Central American assembly production is not the answer to staying competitive with China. The competitive problems we face with China require a direct solution which addresses the Chinese government’s currency manipulation, illegal subsidies, and egregious repression of workers’ rights and democratic rights head on.

Getting slightly better access to a small market will not come close to solving those

problems.

Some CAFTA proponents have made the desperate argument that CAFTA is the

only way to lift Central America out of poverty. Again, we need only examine

NAFTA’s dismal track record to dispel this myth. Since NAFTA was implemented

eleven years ago, real wages in Mexico have actually fallen, the number of people

in poverty has grown, and the number of people migrating illegally to the United

States to seek work has doubled. Trade liberalization in agriculture displaced nearly

a million rural small farmers, swamping the fewer jobs created in the export processing sectors. Many in Mexico who supported NAFTA eleven years ago have now

turned into ardent opponents.

CAFTA is likely to have similar impacts in Central America, especially since

CAFTA does not dramatically increase access to the U.S. market for the Dominican

Republic and Central America. The key impact on the rural poor—the majority of

the population in many of the countries—will be increased competition with much

more efficient U.S. agribusiness.

For industrial employment to be a reliable route out of poverty, workers must

earn decent wages, have the right to form independent unions, and enjoy basic

workplace protections and labor rights. Few workers in Central America today can

exercise their internationally recognized rights to form unions and bargain collectively. Anti-union violence is common, and employers routinely fire workers attempting to exercise these rights, while governments fail to act. Far from addressing

or rectifying these concerns, CAFTA actually weakens the labor rights conditions inVerDate 11-MAY-2000 11:43 Aug 30, 2005 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6621 21632.TXT HCOM1 PsN: HCOM1
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2Such reports include: ‘‘Fundamental Principles and Rights at Work: A Labour Law Study—

Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua,’’ International Labor Organization,

2003; ‘‘Fundamental Principles and Rights at Work: A Labour Law Study—Dominican Republic,’’ International Labor Organization, 2004; ‘‘2004 Country Reports on Human Rights Practices,’’ U.S. Department of State, 2005; ‘‘2004 Annual Survey of Violations of Trade Union

Rights,’’ International Confederation of Free Trade Unions, 2004; and ‘‘Deliberate Indifference:

El Salvador’s Failure to Protect Workers’ Rights,’’ Human Rights Watch, 2003. A summary of

these reports is available in ‘‘The Real Record on Workers’ Rights in Central America,’’ AFLCIO, April 2005.

cluded in current U.S. trade programs, leaving Central American and Dominican

workers more vulnerable than ever. I will address CAFTA’s inadequate labor rights

provisions in more detail later in this testimony.

CAFTA PROVISIONS FAVOR MULTINATIONAL CORPORATIONS OVER WORKERS, COMMUNITIES, AND NATIONAL GOVERNMENTS

CAFTA strengthens protections for multinational corporations, forcing changes in

intellectual property protection regimes that threaten public health, giving corporations new rights to sue governments over regulations they deem too costly or inconvenient, and limiting the ability of future legislators to place conditions on government procurement. This hurts Central America’s prospects for future development,

just as it weakens state legislators and erodes wages and jobs here at home.

The lopsided tilt toward corporate interests helps to explain why CAFTA is so unpopular, both here in the United States and throughout Central America. A recent

poll by Americans for Fair Trade found widespread opposition to CAFTA, with 74%

of respondents saying they would oppose the pact if it caused job losses, even if it

also reduced consumer prices. In Central America, tens of thousands of workers,

farmers, small-business owners, and other activists have taken to the streets to

voice their vehement opposition to the deal and to the lack of transparency in the

negotiation process.

The Bush administration and Central American governments have prioritized

multinational corporate interests at the expense of ordinary citizens. Right now in

Guatemala, the rights of people who need inexpensive medications are being traded

away in favor of CAFTA’s business interests. Pharmaceutical companies have already pressured Guatemala to stop allowing inexpensive drugs in stores. CAFTA

imposes a five-to-ten year waiting period on generic drugs. The humanitarian organization, Doctors Without Borders, has said that these provisions in CAFTA could

make newer medicines unaffordable.

CAFTA’S WORKERS’ RIGHTS PROVISIONS UNACCEPTABLY WEAK

At the same time, despite the overwhelming evidence that Central America’s

workers are routinely abused, CAFTA spectacularly fails to address this problem.

CAFTA’s single enforceable workers’ rights provision requires only that countries

enforce their own labor laws—laws that Human Rights Watch, the International

Labor Organization and even our own State Department have documented as failing

to meet international standards. And CAFTA contains no enforceable provision preventing countries from weakening or even eliminating their labor laws entirely.

Not one country included in the CAFTA comes close to meeting a minimum

threshold of respect for the ILO’s core labor standards: freedom of association, the

right to organize and bargain collectively, and freedom from child labor, forced

labor, and discrimination. In Central America, maquiladora employers pay a workforce made up disproportionately of young women poverty wages to labor for long

hours in unsafe conditions. When these workers try to organize to try to win a voice

at work, they face intimidation, threats, dismissal, and blacklisting.

Labor laws in Central America uniformly fail to protect basic workers’ rights, and

deficiencies in the laws have been repeatedly criticized by the International Labor

Organization (ILO), the U.S. State Department, and independent human rights organization for many years.2 Despite this criticism, these flaws persist today. The

ILO, in its 2003 and 2004 reports on Central American labor laws, identified no

fewer than 27 key deficiencies in the laws with respect to freedom of association and

the right to organize and bargain collectively. Amazingly, the U.S. Trade Representative and Central American countries continue to cite these reports as evidence that

laws in the region largely meet ILO standards—a gross mischaracterization of the

reports themselves. And even these reports, with all the deficiencies they identify,

omit some flaws that the ILO itself had identified with regard to these countries

in earlier observations because of the reports’ limited scope.

A review of the ILO reports and other ILO observations, along with U.S. State

Department reports and independent analyses by human rights groups, reveals a

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wide array of loopholes, gaps, and deficiencies in labor laws in the region. On issues

including penalties for anti-union discrimination, employer interference with workers’ organizations, obstacles to union registration, restrictions on the right to organize above the enterprise level, restrictions on the rights of temporary employees,

onerous requirements for trade union leadership, limits on the activities of federations and confederations, and limits on the right to strike, labor laws throughout

the region fail to meet the minimum standards enumerated by ILO core conventions. The only country to actually reform any of its laws in these areas during the

CAFTA negotiation process was Nicaragua; but some gaps in the law remain even

there. In every other country major deficiencies identified by the ILO remain on the

books today. In fact, some countries have actively weakened their labor laws during

the CAFTA negotiations: Guatemala’s Constitutional Court overturned key elements

of major labor law reforms, while the Costa Rican government introduced legislation

to weaken worker protections.

Employers take advantage of these weaknesses in the labor law to harass, intimidate, and fire workers who dare to organize an independent union. Employers refuse

to bargain with legitimate worker representatives, and have most strikes declared

illegal. Even where employers are flagrantly in violation of the law, they enjoy near

total impunity in many of these countries. The result is a climate of fear, insecurity,

and even physical danger for workers in the region who try to exercise their most

basic rights on the job.

As violation after violation of workers’ rights accumulate, and as governments

refuse to improve their laws or enforce those that do exist, the very institutions of

independent trade unions and collective bargaining founder. Trade union density in

Central American countries is minimal: 7 percent in Honduras, 5 in El Salvador,

3 in Guatemala. In El Salvador, no independent trade unions have been registered

in the past four years. The most recent denial came this year, when the Ministry

of Labor found that port workers did not meet the legally required minimum number to form a union, as a result of the fact that their employer had fired most of

the founding members of the union in direct retaliation for their organizing activities.

There are only two collective bargaining agreements in force in Guatemala’s

maquiladoras—zero in El Salvador’s. In Costa Rica from 1999 to 2004, for every employer that negotiated a collective bargaining agreement with a legitimate trade

union, more than fourteen employers negotiated direct arrangements with employerdominated solidarity associations. In Guatemala, 45 incidents of threats against

trade unionists were reported to the government in 2004—only one conviction was

achieved.

In the face of these inadequate labor laws, CAFTA only requires that countries

enforce the labor laws they happen to have. Obligations to improve one’s labor laws,

to meet ILO standards, and not to derogate from or waive laws in the future are

all completely unenforceable under CAFTA. Thus a country can maintain its laws

far below ILO standards, weaken its laws even further in the future, and face no

consequences under CAFTA. As the discussion above demonstrates, this is not just

a theoretical possibility in Central America—it is the reality that workers live with

every day.

CAFTA LABOR PROVISIONS A STEP BACK FROM JORDAN FTA AND GSP

CAFTA’s failure to include an enforceable requirement that labor laws meet ILO

standards represents a step backwards from the labor rights provisions of the U.S.-

Jordan Free Trade Agreement. The Jordan agreement enjoyed broad support from

labor unions in the U.S. and Jordan, and passed the U.S. Congress unanimously in

2001. The Jordan agreement allows each one of its labor rights obligations to be

brought up under the agreement’s dispute settlement and enforcement mechanism,

including provisions committing countries to meet ILO standards. In contrast,

CAFTA excludes the vast majority of its labor rights obligations from the accord’s

dispute settlement and enforcement mechanisms, and only the requirement that

countries enforce their own labor laws is subject to dispute settlement and enforcement.

CAFTA also backtracks from the Jordan agreement by giving labor rights secondclass status within the agreement’s dispute settlement and enforcement apparatus.

In the Jordan FTA, the dispute settlement and enforcement measures that apply

to the agreement’s labor provisions are identical to those that apply to the agreement’s commercial provisions, and can include fines or sanctions. Under CAFTA,

only violations of the agreement’s commercial provisions can lead to sanctions or punitive fines sufficient to compensate the harm caused by the violation. Violations of

the agreement’s labor obligation must be remedied through the assessment of a nonVerDate 11-MAY-2000 11:43 Aug 30, 2005 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6621 21632.TXT HCOM1 PsN: HCOM1
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punitive fine, and that fine is capped at $15 million regardless of the harm caused

by the violation.

Perhaps most disturbing is the fact that CAFTA’s rules on workers’ rights are actually weaker than the current labor conditions that apply to Central American

countries under our unilateral trade preference programs, the Generalized System

of Preferences (GSP) and the Caribbean Basin Initiative (CBI). CAFTA’s labor chapter backtracks from the labor standards in GSP and CBI, and the agreement eliminates enforcement tools currently available in the unilateral programs.

• The GSP requires countries to have taken or be ‘‘taking steps to afford internationally recognized worker rights,’’ while the CBI instructs the president to

consider ‘‘the extent to which the country provides internationally recognized

worker rights’’ when granting preferential market access under the program.

These rules enable workers to complain about the inadequacy of national labor

laws, not just about the government’s failure to enforce the law. CAFTA, on the

other hand, only requires countries to enforce the labor laws they happen to

have, no matter how weak those laws are now or become in the future.

• The GSP includes a public petition process for the removal of trade benefits. The

AFL-CIO and other labor rights advocates have used the process, in conjunction

with unions in Central America, to bring public pressure on Central American

governments to improve labor rights. Even when the U.S. government exercises

its discretion to reject meritorious GSP petitions, the public forum provided by

the petition process can help focus public attention on workers’ rights abuses

and pressure governments to reform. CAFTA contains no direct petition process

for workers—enforcement can only happen through government-to-government

disputes.

• The GSP and CBI directly condition market access on respect for international

labor rights. While preferential benefits are rarely withdrawn under the programs, the credible threat of reduced trade benefits has successfully changed

government behavior. In addition, petitioners have been able to tailor request

for withdrawal to specific sectors and producers responsible for workers’ rights

violations, helping to create a specific incentive for employers to respect workers’ rights. CAFTA, on the other hand, makes it extremely difficult to withdraw

trade benefits for workers’ right violations. Even if a government has been

found in violation of CAFTA’s labor provisions, it can continue to enjoy full market access under the agreement as long as it pays a small, capped fine to finance labor enforcement activities. The fine in no way penalizes producers for

violations of workers’ rights, and exerts little pressure on governments, who can

reduce their labor budgets by an amount equal to the fine and avoid spending

the fine on projects with political sensitivity such as labor law reform.

The only tool that has helped create the political will to reform labor laws in Central America in the past is our unilateral system of trade preferences. While the

labor rights provisions of these programs are not perfect, they have led to some improvements in labor rights in the region. In fact, nearly every labor law reform that

has taken place in Central America over the past fifteen years has been the direct

result of a threat to withdraw trade benefits under our preference programs.

Even the United States Trade Representative (USTR) touts the reforms that have

been made to Central American labor laws as a result of GSP petitions. USTR argues that the reforms demonstrate Central American governments’ commitment to

workers’ rights, and thus argue for approval of CAFTA. Quite to the contrary, the

reforms demonstrate that governments in the region rarely undertake labor law improvements without outside pressure—pressure that will no longer be applied if

CAFTA is ratified.

• The U.S. government accepted a GSP workers’ rights petition against Costa Rica

for review in 1993, and Costa Rica reformed its labor laws later that year.

• The Dominican Republic reformed its labor laws in 1992 in response to a GSP

petition on workers’ rights.

• El Salvador was put on continuing GSP review for workers’ rights violations in

1992, and the government reformed its labor laws in 1994.

• Guatemala reformed its labor laws in response to the acceptance of a 1992 GSP

petition, and when their case was reopened for review in response to a 2000

petition they again reformed their labor laws in 2001.

• Nicaragua’s GSP benefits were suspended in 1987 for workers’ rights violations,

and it reformed its labor laws in 1996.

The GSP process has also been helpful in addressing enforcement and rule-of-law

problems in the region. Too often, these patterns of violation are the result not just

of limited resources, but of insufficient political will on the part of Central American

governments. GSP cases have helped create that political will. As the result of a

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3See ‘‘Labor Movement Declaration Concerning The United States-Central America Free

Trade Agreement,’’ San Jose, Costa Rica, November 18, 2002. This declaration was signed by

the labor federations of the United States, Guatemala, Nicaragua, Costa Rica and El Salvador.

It is reprinted in, ‘‘The Real Record on Workers’ Rights in Central America,’’ AFL-CIO, April

2005.

2004 petition on El Salvador, for example, the Salvadoran government finally enforced a reinstatement order for union activists that had been locked out for three

years. All appeals to national mechanisms in the case had been fruitless, and the

employer was in outright defiance of a reinstatement order from the nation’s Supreme Court. The last independent union granted legal registration in El Salvador

was only registered after appeals to the Salvadoran Supreme Court, the ILO, and

a GSP petition.

Central American countries need a trade regime that will improve compliance

with fundamental workers’ rights. As long as independent trade unions are thwarted, collective bargaining avoided, and the right to strike repressed, workers will be

unable to win a voice at work and negotiate with their employers for decent working

conditions and wages that reflect the true value of their production. Trade rules

must ensure that governments protect fundamental workers’ rights, and require

that the companies who take advantage of the new rights and mobility that trade

agreements provide be held accountable for their treatment of workers.

CAFTA fails this test. Rather than tie the incentives that additional market access provides to required improvements in workers’ rights, CAFTA does exactly the

opposite. While granting expanded and permanent market access to Central American countries, CAFTA actually reduces the labor rights conditions those countries

are required to fulfill under current trade programs. This failure is particularly

egregious in the Central American context—in countries where labor laws fall far

short of minimum international standards, where governments have a record of indifference towards workers’ rights and hostility towards trade unions, and where

the only tool that has proven successful in improving workers’ rights has been the

threat of the withdrawal of trade benefits.

It is time for policymakers to take an honest look at our trade policy and the impact it has had on workers and communities at home and abroad, and start revising

the rules that govern trade. The American labor movement, along with our brothers

and sisters in Central America, has made substantive and thoughtful proposals on

what changes need to be made to our trade policies.3 We recognize that trade has

the potential to spur growth and create jobs—but to deliver on these promises, we

need to get the rules right. Unfortunately, CAFTA negotiators ignored our proposals.

As a result, we are forced to oppose CAFTA. We are working together with

unions, environmentalists, family farmers, bishops, women’s groups and many others in the U.S. and Central America to stop CAFTA and to build a better way to

trade. Only by rejecting CAFTA can we begin a real dialogue on the new kinds of

trade rules we need to create good jobs, stimulate equitable and sustainable economic development, and support strong democratic institutions.

In sum, CAFTA grants multinational companies that ship U.S. jobs overseas the

following rewards: greater access to the U.S. market, more freedom to violate workers’ rights with impunity, and the ability to challenge government regulations enacted in the public interest. CAFTA’s rules on investment, government procurement,

intellectual property rights, and services create new rights for multinational corporations, but the agreement actually weakens existing protections for workers’

rights, leaving the interests of ordinary working men and women out in the cold.

Members of the subcommittee, I will close with these thoughts. The U.S. economy

continues to break records, but not in ways that help working people. The all-time

high U.S. trade deficit is not an abstract issue; it shows up every day as working

men and women see their plants close, are asked to train their own overseas replacements or are asked to swallow wage and benefit cutbacks that affect their families’ lives in hundreds of ways. Entire communities suffer the consequences of failed

trade agreements. We urge the Congress to reject CAFTA and begin work on just

economic and social relationships with Central America and the Dominican Republic.

Mr. STEARNS. Thank you. Mr. Cohen.

STATEMENT OF CALMAN J. COHEN

Mr. COHEN. Mr. Chairman, Congresswoman Schakowsky, members of the committee, I welcome the opportunity to appear before

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you to express the support for CAFTA as president of ECAT on behalf of the Business Coalition for U.S.-Central America trade.

Like its predecessor FTAs, CAFTA will promote new economic

opportunities, but it is not a panacea the many problems which

have been addressed during the hearing this morning and this

afternoon. It will not address every aspect of the U.S.-Central

America-Dominican Republic relationship. However, it is a comprehensive, high-standard, and commercially meaningful agreement that is very much deserving of the support of this committee

and the U.S. Congress for five reasons.

First, CAFTA levels the playing field and creates new opportunities as you have heard already. Second, CAFTA will promote

growth and partnership in our own neighborhood. Over 20 years

ago the Congress developed a model of economic engagement to

promote stability and growth in the Caribbean Basin. More than

two decades later the so-called CBI programs are no longer sufficient. They are too cumbersome, too inflexible, and too limited to

withstand the pressure of the recent lifting of global textile and apparel quotas, and companies in the region have already started laying off thousands of workers. This is extremely important from a

U.S. perspective since the Central American-Dominican Republic

textile and apparel industry is the second-largest source of economic activity in the region, employing some half million workers

in some of the best-paying jobs in these countries. And this industry is the largest export market for U.S. apparel manufacturers

and yarn and the second largest U.S. export market for fabric. The

competitiveness of the U.S. textile and apparel industries and the

future of their workers depend in significant part on whether or

not the Congress approves the FTA.

Third, CAFTA will promote improved working conditions in this

region. It is precisely through increased trade and economic growth

the developing countries are better able and increasingly motivated

to improve labor and environmental standards. This is particularly

important in the context of CAFTA where nearly half of the population of the six countries lives in poverty. Without CAFTA working

conditions will not get a much-needed boost. Indeed, they are likely

to get much worse.

CAFTA also includes the most robust provisions yet on labor capacity building, including the establishment of a council that oversees a capacity-building mechanism. This capacity-building mechanism and Congressional support for capacity building are precisely

what is needed to make a difference.

The agreement also includes strong and enforceable labor provisions on labor rights that we believe are in fact stronger than the

Jordan FTA and stronger than the existing unilateral trade preference programs. With few exceptions, CAFTA’s labor provisions

are essentially the same as contained in the U.S.-Jordan FTA. The

key differences between the Jordan FTA and CAFTA are, first,

CAFTA clarifies what was implicit in the Jordan FTA. CAFTA includes a provision specifically stating that the only provision subject to dispute settlement is the enforce-your-own-law standard. As

President Clinton said in submitting the Jordan FTA to the Congress, ‘‘It is important to note that the FTA does not require either

country to adopt any new laws in these areas, but rather includes

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commitments that each country enforce its own labor and environmental laws.’’

Second, the U.S.-Jordan FTA includes an underdeveloped dispute

settlement mechanism. The CAFTA, on the other hand, contains a

state-of-the-art, binding dispute settlement mechanism.

The third deference is capacity building. The Jordan FTA merely

makes a statement that cooperative activities enhance labor standards. CAFTA includes concrete provisions to promote labor capacity

building.

I then want to just briefly to go to a point that was raised by

Mr. Gonzalez. In determining the eligibility for duty-free treatment, the trade preference programs prohibit the designation of a

country as a beneficiary if it has not taken or is not taking steps

to afford internationally recognized worker rights. These provisions

require a country’s adherence to internationally recognized worker

rights as a condition of eligibility, rather only that a country has

or is taking steps.

In contrast, CAFTA builds upon the progress achieved by the

unilateral preference program by requiring each of the countries to

enforce its labor laws, subject to binding dispute resolution. This is

actually a very robust standard when you consider what is already

in their laws. For example, all but El Salvador has ratified all eight

of the ILO core conventions, which, according to their own constitutions and laws, become part of their national law. All have already

incorporated in their constitutions and/or their national law the

broad ILO labor standards.

Fourth, CAFTA’s comprehensiveness is critical. During the negotiations, the CAFTA countries sought to exclude certain products

and services completely from liberalization. In the end U.S. negotiators succeeded in negotiating openings to all of their key sectors

and protecting ours.

Sugar is the most notable because the end result is extremely far

from what the CAFTA countries had sought. There is very minimal

increase in the sugar quota for these six countries. The new access

equals less than 1 percent of the 2003/2004 U.S. sugar supply. In

addition, CAFTA includes a compensation mechanism that would

allow the restriction of actual imports, but require the U.S. Government to compensate these countries for any such restrictions.

My final point is that CAFTA is an important test for U.S. leadership on trade. Concerns about laying the playing field for American workers and farms can nowhere be better addressed than in

the WTO. But U.S. influence will be reduced if the first FTA that

the United States negotiates with a group of developing countries

is defeated over a modest increase in sugar imports and because

the labor provisions do not solve every problem.

For all of these reasons I urge your support for the CAFTA.

Thank you.

[The prepared statement of Calman J. Cohen follows:]

PREPARED STATEMENT OF CALMAN J. COHEN, PRESIDENT, EMERGENCY COMMITTEE

FOR AMERICAN TRADE

Mr. Chairman, Congresswoman Schakowsky, Members of the Committee, I welcome the opportunity to appear before you today to express strong support for the

U.S.-Central America-Dominican Republic Free Trade Agreement (CAFTA) as President of the Emergency Committee for American Trade (ECAT) and on behalf of the

61

Business Coalition for U.S.-Central America Trade, for which ECAT serves as the

secretariat.

• ECAT is an association of the chief executives of major American companies with

global operations who represent all principal sectors of the U.S. economy. ECAT

was founded more than three decades ago to promote economic growth through

expansionary trade and investment policies. Today, the annual sales of ECAT

companies total $2 trillion, and the companies employ approximately five and

a half million people.

• The Business Coalition for U.S.-Central America Trade is a coalition of over 400

companies and associations representing all major sectors of the economy with

members in all 50 states that work together in support of the implementation

of the CAFTA. The Business Coalition was formed as the negotiations started

and is working in strong support of Congressional approval of the CAFTA.

• The CAFTA is a comprehensive, commercially meaningful and high standard

agreement. I will focus today on why CAFTA deserves your support.

THE HISTORY OF FREE TRADE AGREEMENTS

Twenty years ago tomorrow, former President Reagan sent to Congress the first

U.S. free trade agreement for Congressional approval—the U.S.-Israel FTA. It was

approved by the House by a vote of 422-to-0 and by the Senate by voice vote. It

was largely a political agreement that included significant, but by no means perfect,

market opening. Indeed, the services aspects of the agreement were merely aspirational and the dispute settlement provisions extraordinarily limited.

Since the U.S.-Israel FTA was approved in 1985, successive Administrations, Republican and Democratic, have successfully sought Congressional approval for eight

additional FTAs, from our largest trading partner Canada in 1989, the NAFTA in

1993, the Jordan FTA in 2001, and the Chile and Singapore FTAs in 2003 to the

Australia and Morocco FTAs in 2004.

Each of these FTAs, from the 19-page Jordan FTA negotiated by the Clinton Administration to the several hundred pages of the Morocco FTA negotiated by the

Bush Administration, has three very important aspects in common:

• First, they seek to promote new opportunities for U.S. manufacturers, farmers

and service providers through the elimination of barriers to U.S. consumer and

industrial goods, farm products and services.

• Second, each FTA seeks to respond to the negotiating objectives set forth by Congress in the trade negotiating authority legislation (Trade Promotion Authority)

that governs the negotiation and Congressional approval of such agreements.

• Third, each FTA sends a strong message to the rest of the trading community

about the United States’ commitment to a rules-based trading system and to

more open markets with developed and developing countries alike.

In each case, with the exception of the U.S.-Israel FTA, concerns were raised that

more should have been done to address various issues—some within the context of

the FTA, some outside. For example:

• With the U.S.-Jordan FTA, environmental groups and others complained about an

extremely weak dispute settlement mechanism that would allow any party to

block dispute settlement proceedings in perpetuity.

• With NAFTA, complaints were raised about the decline in Mexican wages prior

to the conclusion of the FTA and how that would affect American workers.

In some cases, provisions were included as part of the implementing legislation

to address related concerns—such as NAFTA Trade Adjustment Assistance program. In other areas, the FTAs were simply not able, nor intended, to address all

facets of the relationship.

I would also note the importance of these agreements to opening markets for U.S.

exporters in particular. Based on 2004 data, U.S. exports to the six countries with

which the United States had an FTA in 2004 equaled $332.8 billion, accounting for

40 percent of total U.S. exports worldwide; this does not include the Australia or

Morocco FTAs which were not in force in 2004. Let me say that again. Our FTAs

with our six FTA partners in 2004 accounted for 40 percent of total U.S. exports.

CAFTA IS A STRONG AND IMPORTANT TRADE AGREEMENT, BUT IT IS NOT A PANACEA

This background is important to put the CAFTA into the correct context. Like its

predecessors, it is a free trade agreement that seeks to promote new opportunities

for U.S. manufacturers, farmers and service providers. It is not a panacea. It is not

intended, nor did Congress ask, that it address every aspect of the U.S.-Central

American-Dominican Republic relationship. While CAFTA makes important

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public, as well as U.S. exports, it cannot, for instance, solve by itself the problems

of poverty or subsistence farming in the region.

While not perfect—no agreement ever is—CAFTA is very much deserving of the

support of this Committee and the U.S. Congress. From the perspective of ECAT

and the broader Business Coalition, I would suggest that there are five key elements of the CAFTA that are most important for your consideration.

FIRST: CAFTA LEVELS THE PLAYING FIELD FOR U.S. MANUFACTURERS, FARMERS AND

SERVICE PROVIDERS

Through unilateral preference programs overwhelmingly approved on a bipartisan

basis by Congress since the 1980s, some 75 percent of CAFTA imports and 99 percent of CAFTA agricultural products already enter the United States duty-free.

What CAFTA does for U.S. manufacturers, farmers and service providers, is to

make trade with our neighbors a two-way street. CAFTA opens their markets to our goods and our services, which is particularly important given that the six CAFTA

countries already represent the United States’ 12th largest export market worldwide

and our second largest market in Latin America, after Mexico. In particular, CAFTA

eliminates tariffs, tariff rate quotas and non-tariff barriers in all major sectors.

• For U.S. Manufacturers, CAFTA immediately eliminates tariffs on more than

80 percent of U.S. consumer and industrial goods when the CAFTA enters into

force, including on such key products as information technology products, agricultural and construction equipment, paper products, chemicals, and medical

and scientific equipment. CAFTA will eliminate all remaining tariffs on all U.S.

manufactured goods within 10 years. CAFTA also eliminates other major nontariff barriers to consumer and industrial goods, including onerous dealer distribution requirements that created enormous barriers for decades to the ability

of many U.S. companies to sell their products in these countries. • For U.S. Service Providers, all six CAFTA countries committed to open up

their services market on a negative list basis (listing exceptions to full market

opening), with particular benefits for telecommunications, financial, distribution, information technology, audiovisual and entertainment, energy, transport,

construction, express delivery, professional and other services. The six countries

also committed to significant provisions on regulatory transparency and independent regulatory authorities. Of particular importance are Costa Rica’s commitments to open up key portions of its currently closed telecommunications

and insurance markets. • For U.S. Farmers, CAFTA eliminates tariffs on over half of U.S. agriculture

products immediately, with most remaining duties on U.S. products phased out

over 15 years. Since 99 percent of their agricultural products already enter the

U.S. market duty-free, this is particularly important to provide reciprocity. The

agriculture provisions create significant new opportunities in particular for U.S.

producers of beef, pork, dairy, corn, wheat and grains, soybeans, rice, cotton and

processed foods.

• For U.S. Creative and Scientific Industries, CAFTA establishes strong rules

for the protection of intellectual property that are critical to promote innovation

and new research in numerous sectors, from information technology to chemical,

pharmaceutical and other scientific industries, and to stimulate a rich and diverse marketplace for the development and publishing of business information

and creative works.

• For U.S. Investors, CAFTA provides strong protections derived from U.S. legal

principles and practice, including, non-discrimination, due process rights,

prompt compensation for expropriation, free movement of capital, no performance requirements (such as local sourcing rules or export requirements) and the

resolution of disputes in a neutral and objective forum. In accordance with Congress’ directions in Trade Promotion Authority, enacted as part of the Trade Act

of 2002, the CAFTA also ensures that key protections conform to U.S. legal

principles and practice and that disputes are handled transparently, efficiently

and with public input. Unlike any prior FTA, the CAFTA also provides a concrete mechanism for the development of an appellate or other review procedure

to ensure the coherence of decisions.

SECOND: CAFTA WILL HELP PROMOTE GROWTH AND PARTNERSHIPS IN OUR

NEIGHBORHOOD

Over 20 years ago, former President Reagan and the Congress developed a model

of economic engagement to promote stability and growth in the Caribbean Basin.

The so-called Caribbean Basin Initiative (or Caribbean Basin Economic Recovery

Act—CBERA) provided duty-free access to many goods from the CAFTA countries

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and the rest of the Caribbean, in significant part to help stem the flow of communism by promoting economic growth and the reduction of poverty.

More than two decades later, that program, which was expanded and improved

most recently through the Caribbean Basin Trade Partnership Act (CBTPA), enacted as part of the Trade and Development Act of 2000, helped this region emerge

from a period of civil war, insurgency and military dictatorship to democratic stability.

While CBI and CBTPA have been important drivers for economic growth, they are

no longer sufficient. The Central American-Dominican Republic textile and apparel

industry that these programs helped create now faces extraordinary competitive

pressures as a result of the elimination of global quotas on textiles and apparel at

the beginning of 2005. The CBTPA program in particular is too cumbersome, too

inflexible and too limited to withstand this additional pressure, and companies in

the region have already started laying off thousands of workers.

This is extremely important from a U.S. perspective, since the Central AmericanDominican Republic textile and apparel industry is the second largest source of economic activity in the region—employing some 500,000 workers in some of the bestpaying jobs in these countries. With an overall poverty rate of 47 percent and the

largest source of economic activity being subsistence agriculture, these countries are

facing a significant slowdown in employment and growth if CAFTA is not passed.

That has important consequences for working men and woman in the six CAFTA

countries, but it also has important consequences for working men and women here

in the United States since these countries are the largest export market for U.S.

apparel manufactures and yarn and the second largest export market for U.S. textiles. The competitiveness of the U.S. textile and apparel industries and the future

of their workers depend in significant part on whether or not Congress approves the

CAFTA.

With CAFTA, and the permanence, flexibilities and reciprocity it creates for the

U.S.-Central American-Dominican Republic textile and apparel industries, U.S.

workers in these industries will continue to have markets in the six CAFTA countries. This will likely translate into economic growth in these countries, making

them a more vibrant trading partner in the years ahead. Without CAFTA, these

markets will continue the downward slide that has already begun. And since most

Asian garments include little, if any, U.S. input, this has very negative implications

for U.S. textile and apparel workers.

THIRD: CAFTA BUILDS UPON THE EXISTING U.S. INTEREST IN PROMOTING IMPROVED

WORKING CONDITIONS THROUGH ECONOMIC GROWTH, CAPACITY BUILDING AND A

STRONG DISPUTE SETTLEMENT SYSTEM

As the World Bank and others have documented, it is precisely through increased

trade and economic growth that developing countries are better able and increasingly motivated by growing working and middle classes to improve labor and environmental standards. Since World War II, the liberalization of trade has helped

produce a six-fold growth in the world economy and a tripling of per capita income

and enabled hundreds of millions of families to escape from poverty and enjoy higher living standards. The World Bank has documented that developing countries that

participate actively in trade grow faster and reduce poverty faster than countries

that isolate themselves. In the 1990s, per capita incomes grew 5.1 percent in developing countries with high trade and investment flows, while more isolated countries

saw incomes decline by 1.1 percent. Contrary to many popular perceptions, NAFTA

has also been found to have a positive effect on wage levels and the reduction of

poverty in Mexico. While it is alone not enough to produce gains for all workers in

Mexico, NAFTA has had very positive effects.

The relationship between economic growth and labor rights is particularly important, given that nearly half of the population of the six CAFTA countries lives in

poverty and Nicaragua is the second poorest country in the hemisphere, after Haiti.

Without CAFTA, working conditions will not get a much-needed boost. In fact, they

are likely to get much worse with the loss of some of the best-paying jobs in these

countries in the textile and apparel sector. CAFTA, by creating new opportunities

and making them permanent, has the ability to reverse the downslide and loss of

thousands of jobs that we have seen in these countries since global textile and apparel quotas were lifted.

CAFTA also includes the most concrete provisions yet on labor capacity building

that will promote strong improvements in the lives of workers. In particular,

CAFTA would establish a Labor Affairs Council that will oversee a Labor Cooperation and Capacity Building Mechanism to:

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• establish capacity-building priorities, including with respect to ‘‘fundamental

rights and their effective application,’’ worst forms of child labor, labor administration and inspection systems. • develop specific cooperative and capacity-building activities. • exchange information on laws and practices and ways to strengthen them. • seek support from the ILO, Inter-American Development Bank, World Bank and

Organization of American States to advance common commitments. • seek input from worker and employer representatives and the public.

Capacity building by the ILO and other institutions has, over the years, resulted

in very concrete progress in working conditions in the region and throughout the

world. In Central America, for example, ILO technical assistance through the IPEC

(International Programme for the Elimination of Child Labor) has provided concrete

assistance to tens of thousands of children involved in child labor and their parents.

Much more remains to be done to improve working conditions, but it is most often

the lack of resources and technical ability, not particular laws, that limit improvements in labor conditions. CAFTA’s capacity building mechanism and Congressional

support for capacity-building programs are precisely what is needed to make an important difference. In this regard, I would note the existing commitments by the

U.S. and by the Central American/Dominican Republic governments to labor capacity building:

• The Administration began its first CAFTA-related labor project before the agreement was even concluded, with a $6.75 million grant to the Foundation for

Peace and Democracy to help improve working conditions in the region. In the

FY 2005 Appropriations Act, Congress allocated $20 million for labor and environment capacity building for the CAFTA countries.

• On April 4, 2005, the six CAFTA countries made a strong and unprecedented public commitment to continue to improve labor standards and their implementation by endorsing the recommendations in the very detailed report on their

labor laws and working conditions—The Labor Dimension in Central America

and the Dominican Republic—prepared by their trade and finance ministries in

conjunction with the Inter-American Development Bank. The report identifies

specific areas where the countries need to improve labor standards and implementation and where additional technical assistance is required.

CAFTA is not meant to be, nor could it be, a panacea; yet it represents a muchneeded modernization of the U.S.-Central American-Dominican economic relationship that will promote better working conditions through economic opportunities

and a strong capacity-building program in the region.

Beyond the economic opportunities and capacity building that CAFTA will promote, the agreement itself includes strong and enforceable provisions on labor

rights. I know this is a much debated subject, so I will focus my remarks on the

two often-heard critiques of CAFTA with which I strongly disagree—that it is weaker than the Jordan FTA and weaker than existing unilateral trade preference programs:

1. CAFTA HAS VERY SIMILAR, IF NOT STRONGER, LABOR PROVISIONS THAN THE U.S.-

JORDAN FTA.

With few exceptions, CAFTA’s labor provisions are essentially the same as contained in the U.S.-Jordan FTA. The commitments are largely the same, except in

those cases where CAFTA strengthens them or adds new commitments, such as to

ensure access to fair, equitable and transparent tribunals for labor law enforcement.

The key differences between the U.S.-Jordan FTA and CAFTA are:

CAFTA Clarifies What Was Implicit in the Jordan FTA. CAFTA includes a

provision specifically stating that the only provision subject to dispute settlement

is the ‘‘enforce-your-own-law’’ standard. This provision essentially clarifies the fact

that the enforce-your-own-law standard is the only language in either the Jordan

FTA or CAFTA that expresses an enforceable commitment as opposed to a hortatory

objective. Indeed, the CAFTA clarifies the point former President Clinton made

when he transmitted the U.S.-Jordan FTA to Congress on January 6, 2001:

‘‘The FTA joins free trade and open markets with civic responsibilities. In this

Agreement, the United States and Jordan affirm the importance of not relaxing

labor or environmental laws in order to increase trade. It is important to note

that the FTA does not require either country to adopt any new laws in these

areas, but rather includes committments that each country enforce its own labor

and environmental laws.’’ (emphasis added).

This statement was obviously not made because Jordan had perfect labor laws.

Indeed, as the 2004 State Department Report on Human Rights found: ‘‘[Jordan’s]

[l]abor laws mandate that workers must obtain Government permission to strike.

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Unions generally did not seek approval for a strike, but workers used the threat of

a strike as a negotiating tactic. Strikes are prohibited if a labor dispute is under

mediation or arbitration.’’ (emphasis added).

CAFTA Contains a More Developed and Binding Dispute Settlement

Mechanism. The U.S.-Jordan FTA includes an underdeveloped dispute settlement

mechanism that lacks strict time limits for the appointment of panelists, meaning

that complaints can be blocked in perpetuity. In the case of the CAFTA, the dispute

settlement procedures with respect to labor and environmental issues are much

more detailed and developed and result in binding panel reports, with strict time

limits for the establishment of panels and potentially the imposition of monetary assessments or trade sanctions. Panels are authorized to review a Party’s commitment

to enforce its labor and environmental laws as sought by the Trade Promotion Authority negotiating objectives. If a panel finds that a Party is failing to enforce such

laws and that the Party does not bring its actions into accordance with the FTA

obligations, the other Party is authorized to assess a monetary penalty that will be

used for improving labor or environmental conditions in the complained of Party.

If that monetary penalty is not paid, the complaining Party ‘‘may take other appropriate steps to collect the assessment or otherwise secure compliance...[including]

suspending tariff benefits under the Agreement as necessary to collect the assessment . . .’’

CAFTA Contains a Robust Capacity-Building Mechanism. The U.S.-Jordan

FTA contains merely a statement that cooperative activities may enhance labor

standards. CAFTA, as discussed previously, includes the most concrete provisions

included in any FTA on labor capacity building—provisions that are likely to have

a much more important effect than dispute settlement in promoting enhanced labor

conditions.

2. CAFTA REPRESENTS A STRONGER WORKER RIGHTS MODEL THAN UNILATERAL

PREFERENCE PROGRAMS

In determining eligibility for duty-free treatment, the Generalized System of Preferences (GSP), CBTPA and CBERA prohibit the designation of a country as a beneficiary if it ‘‘has not [taken] or is not taking steps to afford internationally recognized worker rights’ and not implementing its commitments to eliminate the worst

forms of child labor. CBTPA also provides that the President should consider the

‘‘extent to which the country provides internationally recognized worker rights.’’

As language of GSP, CBTPA and CBERA makes clear: these provisions do not require a country’s adherence to internationally recognized worker rights as a condition of eligibility; rather only that a country has or is taking ‘‘steps.’’ Indeed, in considering the CBTPA bill on the Senate floor, the proposal to condition CBTPA benefits on a country’s compliance with internationally recognized worker rights (S.

Amdt No. 2847) was rejected by more than a two-to-one margin.

While GSP, CBTPA and CBERA have been used by successive Administrations

to help promote improvements in the labor standards in the Caribbean Basin countries, both the Clinton and Bush Administrations have repeatedly found that all six

of the CAFTA countries have satisfied the taking ‘‘steps’’ standard of these programs. Indeed, in October 2000, the Clinton Administration designated all 24 Caribbean Basin countries as eligible for the new CBTPA benefits.

CAFTA builds upon the progress achieved by the unilateral preference programs

by requiring each of the CAFTA countries to enforce its labor laws, which the unilateral preference programs helped improve. This obligation is subject to binding

dispute settlement, including potential monetary assessments and trade sanctions.

Given that each of the CAFTA countries has already adopted robust treaty and constitutional, as well as national law, labor protections provisions and CAFTA requires actual adherence to those laws, CAFTA actually provides a much stronger

framework than the existing preference programs. Consider:

• All but El Salvador have ratified all eight of the ILO core conventions (El Salvador has ratified six), which, according to their own constitutions and laws, become part of their national law.

• All but the Dominican Republic have already incorporated in their constitutions

all of the broad core ILO standards—the rights of freedom of association and

collective bargaining and prohibitions against discrimination, child labor and

forced labor.

• All six CAFTA countries have very detailed national laws on labor rights covering

all four core ILO labor principles, including many of the key provisions called

for in the very detailed ILO conventions.

• The CAFTA countries recently committed to strengthening labor standards and

enforcement in their countries as recommended in The Labor Dimension in CenVerDate 11-MAY-2000 11:43 Aug 30, 2005 Jkt 000000 PO 00000 Frm 00069 Fmt 6633 Sfmt 6621 21632.TXT HCOM1 PsN: HCOM1
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tral America and the Dominican Republic, endorsed by the Trade and Labor

Ministers of each of the six CAFTA countries.

Even more importantly, the CAFTA mechanism also includes an institutional

framework to support labor capacity building within the CAFTA countries, the very

activities that together with economic development are likely to have the greatest

impact on improving working conditions within the region.

Suggestions that CAFTA, unlike the unilateral preference programs, will allow

countries simply to repeal strong labor provisions ignore several key facts:

• That the labor language of the unilateral preference programs in fact allows countries to move backward, requiring only that a country has or is taking ‘‘steps.’’ • That the labor protections in the CAFTA countries are embedded in their constitutions and international treaties and, as a result, would be very difficult to

undo if these countries wanted to. • That CAFTA requires each country to ‘‘strive to ensure that its laws provide for

labor standards consistent with the internationally recognized labor rights’ and

to improve those standards in that light.’’ The six CAFTA countries also made

the unprecedented commitment to continue to improve labor standards and

their implementation by endorsing the recommendations in The Labor Dimension in Central America and the Dominican Republic. • That CAFTA provides for ongoing work through a robust capacity-building mechanism to help each country with regard to labor issues, including fundamental

rights and their effective application, and the worst forms of child labor, which

are specifically included as subjects for labor capacity building in the CAFTA

labor chapter.

We can debate at length the legal provisions in the CAFTA, compared to the U.S.-

Jordan FTA, the trade preference programs or even NAFTA. Yet, I think it is critical to reemphasize that CAFTA’s real power in improving labor conditions in the

region is through economic opportunities and growth and a concrete capacity-building framework that Congress has a strong voice in promoting and sustaining. Without CAFTA, there are reduced economic opportunities; in fact there are likely to be

significant job losses in the region. Without CAFTA, there is no framework or plan

of action to improve working conditions through capacity building in the region. In

short, we strongly believe that CAFTA provides a much stronger framework for promoting working conditions in the region.

FOURTH: CAFTA’S COMPREHENSIVENESS IS CRITICAL

ECAT and many in the Business Coalition have been working on this agreement

even prior to the start of actual negotiations in January 2003. What we sought on

behalf of the U.S. manufacturers, service providers and farmers that make up our

groups was a comprehensive agreement that provided new access in all areas. As

the negotiations progressed, it was very clear that the CAFTA countries, which already enjoy significant duty-free access into the United States, wanted to exclude

certain products and services completely from liberalization—largely agricultural

products and key service sectors, particularly in Costa Rica. At the same time, their

negotiators sought substantial new access in areas in which they remained restricted in the United States, most notably textiles and apparel and sugar. In both

areas, U.S. and the CAFTA countries’ negotiators reached compromises that provided significant protections to U.S. interests.

Sugar is most notable because the end result is extremely far from what the

CAFTA countries had sought. There is a very minimal increase in the sugar quota

for these six countries—109,000 metric tons in year one that will increase to 153,000

metric tons by year 15. This new access—which will entail no final reduction of the

tariff on sugar—equals less than one percent of the 2003/2004 U.S. sugar supply

and less than seven percent of U.S. imports of sugar. In addition, CAFTA includes

a compensation mechanism that would allow the restriction of actual increased imports, but require the U.S. government to compensate these countries for any such

restrictions.

Failure to include any increased sugar access in the CAFTA would have resulted

in a negotiating dynamic that could easily have unraveled the very significant new

access provided to all other parts of U.S. agriculture, U.S. manufacturing and U.S.

services. Instead of the elimination of tariffs on all beef, pork, rice, soybean, poultry

and other key crops, the agreement would have been a patchwork of exceptions.

And that brings me to my last point.

FIFTH: CAFTA IS AN IMPORTANT TEST FOR U.S. LEADERSHIP ON TRADE

For many U.S. companies, the most significant trade negotiation is the ongoing

WTO Doha Development Agenda. It has had a rocky several years and only last

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summer seemed to be moving forward in earnest as a result of the so-called Framework Agreement. Yet, our negotiators are now faced with perhaps the most difficult

period as they work to promote commitments by other countries to significant new

access for U.S. farm and manufactured goods and U.S. services.

CAFTA represents an important test for the United States. It is the first time

that the United States has negotiated an FTA with a group of developing countries.

If opponents to CAFTA are successful and CAFTA is not approved, what type of

message would that send to developing countries around the world with which the

United States is trying to build coalitions to support new access in Europe, Japan

and elsewhere? How does the United States explain that it is scared of six small

countries in its own neighborhood over a modest increase in sugar imports and because the labor provisions do not solve every problem?

Concerns that many on this Subcommittee have expressed about leveling the

playing field for American workers and farmers can nowhere be better addressed

than in the WTO, but U.S. influence in the Doha Development Agenda will be reduced if the CAFTA is not approved.

With CAFTA, on the other hand, we have expanded our block of countries that

support common goals and common principles. The WTO Doha Development Agenda

will still be a difficult negotiation, but we will have allies in the developing world

with which to move forward.

CAFTA will benefit the United States and our manufacturing, services and agricultural producers and workers through the expansion of markets, renewed partnerships to advance the competitiveness of U.S.-Central American-Dominican industries, and the development of a stronger, more stable hemisphere. It will level the

playing field for our workers by eliminating barriers in these six countries. It will

also help improve working conditions in the region through new economic opportunities and a robust and focused capacity-building mechanism. On behalf of ECAT and

the Business Coalition, I strongly urge your support for this agreement.

Mr. STEARNS. I thank the gentleman. Mr. Vargo.

STATEMENT OF FRANK VARGO

Mr. FRANK VARGO. Thank you very much. I am very pleased to

be here, Mr. Chairman and Congresswoman Schakowsky.

The National Association of Manufacturers is extremely supportive of this agreement. It is a great agreement despite everything you have heard against it. In trying to think of what is really

important here, though, is there anything I could say to the subcommittee today, I thought I would quote the President. It is always a useful thing to do. Something the President said on April

12. The President said, ‘‘It is of vital importance to every nation of

this hemisphere that the American Governments individually take,

without further delay, such action as may be possible to abolish all

unnecessary and artificial barriers and restrictions which now

hamper the flow of trade between the peoples of the American Republics.’’

Now, this wasn’t President Bush, although it could have been.

He said pretty much the same thing. Because this was April 12,

1933 when the President was Franklin Delano Roosevelt, and the

occasion was the introduction of the Good Neighbor Policy. And

that is fundamentally what CAFTA is really most importantly

about. It is about being good neighbors. It is about the United

States working with its neighbors, and our neighbors can benefit

us in this instance as well.

When we look at this agreement, you know, people just keep acting as though we don’t already have an agreement. It is a one-way

agreement. It has been a one-way agreement. The United States

has been very generous, and now in response for making this

agreement permanent, these countries are saying we will give you

the open access to our market. In the NAM’s estimate, and it is

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available to you, is that we can pick up $1 billion of manufactured

exports here because we will be more competitive than the European or Japanese or other competitors in Central America. More importantly, we will save—it could be up to $4 billion of

exports that would otherwise be at risk if these countries lose their

apparel industry to China or other Asian producers. Why? Because

they sell $10 billion of apparel to us. We have 40 percent of their

market. If they lose $10 billion to us, they are not going to pick

it up elsewhere. They will have to cut their imports $10 billion. On

average, then, they will have to cut their imports from us $4 billion. Does anybody up there think that if China picks up $10 billion of textile exports to the U.S., they are going to spend $4 billion

in the United States? I certain don’t.

When we look at the impact on their economy, again, if they

were to lose their apparel industry, half a million people, you know,

the political instability that could be generated is something you all

ought to contemplate. But we looked at the figures; it is also equivalent to 7 percent of their GDP. If they lost 7 percent of their GDP,

that is something that would not contribute to their stability,

would not be helpful for migration to the United States.

And as far as I can tell, there are really two problems that people

are saying: sugar and the labor standard. Now, sugar really got a

good deal. It is a sweetheart deal. The Secretary of Agriculture, all

the analysis indicates prices aren’t going to come down, the sugar

industry is not going to be hurt. The sugar industry is concerned

about a slippery slope. You can’t take agreements on what other

agreements might or might not be in the future. This is a good

agreement. The sugar industry, frankly, should say thank you for

what they have here and let us get on with it. Because the NAM

and I think other agricultural sectors are not going to sit by and

let a good agreement—and let our whole trade policy, if you will,

be paralyzed by sugar the way Japan’s trade policy has been paralyzed by rice all these years. It is a good agreement. We should

move on with it.

Now, labor rights, in essence what I am hearing is until these

countries clean up their labor act, until they have perfect labor

laws or very good labor laws—perhaps better than ours in some instances; we can’t meet the ILO standards—we don’t want them to

lower their tariffs to us. And to me that makes no sense. We want

them to lower their tariffs, we want this agreement, and we will

work with them to improve labor conditions. The worse thing you

can do for labor conditions there is put a half million people out

of work.

A lot has been said that CAFTA and NAFTA—let me make just

a couple of points quickly, Mr. Chairman. People blame NAFTA as

being kind of the root of all trade evil. You know, with manufactured goods, we have about a $500 million trade deficit. Now, $49

billion of that is with NAFTA, less than 10 percent. $25 billion is

with Mexico, less than 5 percent. And 95 percent is outside. We

have four times the deficit with the European Union in manufacturers than we do with Mexico. NAFTA has contributed about twothirds of our entire export growth. If we had the other countries

of the world, if our exports to them and imports with them had

grown the same as with NAFTA, our global trade deficit would be

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about $200 billion less than it was. And conversely, if our exports

and imports with NAFTA had performed as they did with the rest

of the world, our deficit with NAFTA would have been three times

as large.

Our trade agreements aren’t the problem. They are part of the

solution. We are a very, very open market. Today, as we speak, 70

percent of everything we bring in to the United States comes in

duty-free. We have a lot of barriers overseas. We want those barriers down. Some people suggest the way to do that is withdraw

from the trading system; let us have global trade anarchy; we are

a big country; we will push others around. Yes, we tried that in the

1930’s. The only way to get trade barriers down in other countries

is through trade agreements, and that is what we want. And this

is a good trade agreement. It is an excellent trade agreement. And

it is a trade agreement with six little struggling countries whose

economy is the size of Sacramento, California.

I live in the greatest country on earth. I don’t want that country

to turn to the rest of the world and say we were afraid to enter

into an agreement with Sacramento, California because it was

going to devastate our economy.

Thank you, Mr. Chairman.

[The prepared statement of Frank Vargo follows:]

PREPARED STATEMENT OF FRANKLIN J. VARGO, VICE PRESIDENT, INTERNATIONAL

ECONOMIC AFFAIRS, NATIONAL ASSOCIATION OF MANUFACTURERS ON BEHALF OF

THE NATIONAL ASSOCIATION OF MANUFACTURERS

Mr. Chairman and Members of the Subcommittee: I am pleased to testify today

on behalf of the National Association of Manufacturers (NAM) to provide a perspective on the U.S.-Central America-Dominican Republic and Free Trade Agreement

(CAFTA-DR). The National Association of Manufacturers is the nation’s largest industrial trade association, representing small and large manufacturers in every industrial sector and in all 50 states. Headquartered in Washington, D.C., the NAM

has 10 additional offices across the country. All of our members are affected directly

or indirectly by trade and have a keen interest in the factors affecting our trade

and international economic relations.

The U.S.-Central America-Dominican Republic Free Trade Agreement (CAFTADR) is unambiguously a winner for U.S. manufacturing. The NAM strongly supports

this comprehensive agreement. It levels the playing field for U.S. producers by providing the same access to DR-CAFTA markets that their producers enjoy in the U.S.

market.

Under CAFTA-DR, U.S. manufactured goods exports will become duty-free (80%

as soon as the agreement goes into effect), while European and other competitors

will continue to face CAFTA-DR’s tariffs and other trade barriers. As a direct result,

U.S. manufacturers stand to gain $1 billion of additional manufactured goods exports, with approximately 12,000 related job opportunities for American workers, according to an analysis by the NAM.

More significantly, CAFTA-DR could preserve up to four times that amount of existing U.S. exports. Without the agreement, CAFTA-DR countries are at severe risk

of losing their $10 billion of apparel exports to the United States to Asian competitors, and would have to cut their global imports by $10 billion—over 40% of which

would be lost U.S. exports worth $4 billion, affecting 48,000 U.S. jobs.

The agreement also strengthens the ability of U.S. and Central American producers to compete against China and other Asian competitors. If the CAFTA-DR

countries lost their apparel industry to Asian producers, 550,000 people could be put

out of work in the region. Loss of their apparel exports to the United States would

cause the region’s GDP to fall about 7 percent, putting their economies into serious

recession and slashing U.S. exports to the region.

Currently, 80% of U.S. imports from CAFTA-DR are duty-free—due to the oneway market access programs already provided to them; moreover, excluding textiles,

93% of U.S. manufactured goods imports from CAFTA-DR already are duty-free.

While the agreement has significant potential to maintain existing CAFTA-DR exports to the United States, it is unlikely to generate significant new net manufacVerDate 11-MAY-2000 11:43 Aug 30, 2005 Jkt 000000 PO 00000 Frm 00073 Fmt 6633 Sfmt 6621 21632.TXT HCOM1 PsN: HCOM1
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tured goods imports into the United States. This is because the CAFTA countries

already have open access to the U.S. market for almost all manufactured goods.

Moreover, the six CAFTA countries together have an economy of only $77 billion.

That makes their combined economy about the size of Sacramento, California!

THE CAFTA-DR FREE TRADE AGREEMENT

The U.S.-Central American-Dominican Republic Free Trade Agreement (CAFTADR) would increase trade among the United States and Costa Rica, the Dominican

Republic, El Salvador, Guatemala, Honduras, and Nicaragua. The free trade agreement (FTA) will eliminate tariffs to agricultural and manufactured goods, and would

improve the rules governing trade—such as by strengthening intellectual property

protection, increasing safeguards against product counterfeiting and copyright piracy, strengthening investment rules, opening access to government procurement,

facilitating electronic commerce, speeding customs processing, encouraging express

delivery, and opening financial, telecommunications and other services markets.

It is important to stress the comprehensive nature of the agreement’s coverage,

and also its very strong and positive contributions toward improving both labor and

environmental conditions in the CAFTA-DR region.

The CAFTA-DR countries already enjoy almost completely open access to the U.S.

market, but maintain significant barriers to U.S. exports. The agreement would

level the playing field for U.S. producers by providing the open access to the

CAFTA-DR countries that they already have in the U.S. market because of the oneway market access programs provided to them by the United States in earlier years.

The agreement would benefit the CAFTA-DR countries by making their access to

the U.S. market permanent and by bolstering the region’s ability to compete against

Asian producers.

U.S. MANUFACTURED GOODS TRADE WITH CAFTA-DR

The CAFTA-DR region imported $15.7 billion of U.S. goods in 2004, as shown in

Table 1., making it the 13th largest export market for the United States. In the

Western Hemisphere the CAFTA-DR market is second only to Mexico as a market

for U.S. exports. It is a larger market for the United States than Brazil, even

though Brazil’s economy is considerably larger than the combined economies of the

CAFTA-DR countries.

Manufactured goods predominate U.S. trade with the CAFTA-DR countries. Fully

87 percent of U.S. exports and 83 percent of U.S. imports are manufactured goods.

Textiles and apparel are the largest category of goods traded, accounting for about

55 percent of U.S. imports and over one-fourth of U.S. exports. U.S. textile exports

consist principally of fabric and other textiles that are inputs into CAFTA-DR apparel production that is exported back to the United States under existing preference programs. CAFTA-DR accounts for nearly 30 percent of U.S. textile exports

to the world.

U.S. manufactured goods trade with the CAFTA-DR countries typically runs a

small deficit overall, but a large and growing surplus in non-textile/apparel areas,

as is shown in Table 1. Last year’s manufactured goods deficit was $1.1 billion, comprised of a $5.4 billion deficit in textiles and apparel trade and a $4.3 billion surplus

in all other manufactured goods trade. Paper and paper products, chemicals, motor

vehicles and other transportation equipment, machinery, and electrical equipment

and appliances are significant U.S. manufactured goods exports to the region.

Table 1

U.S. Merchandise Trade with CAFTA-DR, 2004

Millions of Dollars

Exports Imports Balance

Total ........................................................................................................................ $15,731 $17,663 -$1,932

Manufactured Goods ............................................................................................... $16,328 $14,719 -$1,091

Textiles and Apparel ........................................................................................... $4,244 $9,679 -$5,435

Other Manufactured Goods ................................................................................ $9,384 $5,040 $4,344

Other Goods ............................................................................................................ $2,103 $2,944 -$841

Source: U.S. Census Bureau Trade Stastics.

The United States is region’s major trading partner. Using trade statistics of the

six countries as compiled by the International Monetary Fund (IMF), the U.S. share

of CAFTA-DR’s global imports was 41 percent.

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Table 2

CAFTA-DR Imports from the World and U.S., 2003

2003 Total

Imports from

World,

$ millions

2003 Total

CAFTA-DR

Imports from

the U.S.,

$ millions

U.S. Import

Market Share,

%

CAFTA-DR total ....................................................................................................... 36,627 14,968 41%

Costa Rica .............................................................................................................. 7,663 1,775 23%

Dominican Republic ................................................................................................ 8,082 4,214 52%

El Salvador .............................................................................................................. 5,763 2,881 50%

Guatemala ............................................................................................................... 7,339 2,501 34%

Honduras ................................................................................................................. 5,894 3,129 53%

Nicaragua ................................................................................................................ 1,887 469 25%

Source: International Monetary Fund.

The United States is also the CAFTA-DR region’s largest customer. IMF data show that in 2003 the CAFTA-DR countries exported $24.6 billion to the world. U.S.

imports from the region that year were $16.9 billion, nearly 70 percent of the

CAFTA-DR countries’ global exports. By far their most important export is their

shipments of apparel to the United States, which in themselves comprise 40 percent

of the region’s total exports of all products to the world.

HOW THE CAFTA-DR AGREEMENT WILL EFFECT U.S. EXPORTS

The CAFTA-DR free trade agreement has the potential to have a significant effect

on U.S. exports. There will be three types of effects: (1) expansion of U.S. exports

stemming from the reduction and elimination of CAFTA-DR tariffs on U.S. production; (2) expansion of U.S. exports through the reduction of non-tariff barriers in the

CAFTA-DR countries and the trade facilitation measures they are committed to

take; and (3) preservation of existing U.S. exports that would otherwise be lost if

CAFTA-DR garment production shifted to China or other Asian nations. Together, these three effects could total to as much as $5 billion. The tariff effect would be roughly $1 billion. Non-tariff effects are important and positive, but difficult to quantify. By far the largest of the effects would be the preservation of existing U.S. exports that would be saved by reducing or preventing the loss of CAFTADR production to China and other Asian nations, a loss that would result in a sharp

reduction in the amount of goods the CAFTA-DR region buys from the United

States.

TARIFF EFFECTS

Producers in the CAFTA-DR region already have very open access to the U.S.

market, while U.S. producers face significant trade barriers in attempting to sell

into their markets. Thus the agreement can be expected to have a stronger expansion effect on U.S. exports than on U.S. imports. U.S. manufactured goods exports

to the CAFTA-DR region face tariffs that, on a weighted average by major product

groups, are generally in the 4 to 10 percent range, as is shown in Table 3. These

tariff averages reflect both very low tariffs but also tariffs that are in the range of

15-20 percent or even higher.

In examining the likely effects of tariff elimination, the NAM utilized an econometric trade substitution model. This model was applied to all U.S. manufactured

goods exports other than textiles and apparel. Because of the inter-relationship between CAFTA-DR garment production and the inter-related requirement for the use

of U.S. fabrics and other inputs, an econometric model would not yield meaningful

results. The NAM’s estimates of manufactured goods export gain are thus net of the

textiles and apparel sector.

It should be noted, however, that the U.S International Trade Commission’s

(USITC) analysis indicated the agreement would boost U.S. textile and apparel exports by $700 million, and U.S. textile and apparel imports by $680 million—essentially expecting a neutral effect on these industries.

The NAM analysis takes consideration of the substitutability of U.S. exports that

might displace existing domestic production in the CAFTA-DR countries, and U.S.

exports that would displace third-country exports to the region. An examination of

the industrial production structure of CAFTA-DR manufacturing industry and the

composition of U.S. exports showed very little overlap or substitutability. The vast

bulk of U.S exports to the region are products that are not made in the CAFTADR region.

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There is, however, a high degree of similarity in the composition of U.S. exports

to CAFTA-DR and other country exports to the region, and this is where almost all

of the tariff effect will take place on U.S. exports. U.S. exports to the region will

become duty-free, while exports from the European Union, Canada, Japan, and

other countries will continue to be subject to the full duties of the CAFTA-DR countries. This will make U.S. products more price-competitive relative to third-country

production and will result in a shift of CAFTA-DR purchases from the other suppliers to U.S. products.

The results of the NAM tariff effects model are shown in Table 3, below. The

elimination of tariffs on U.S. exports of manufactured goods (leaving aside textiles

and apparel, as explained above, is estimated to generate over $1 billion in additional U.S. manufactured goods exports. Miscellaneous manufactures, electrical

equipment, chemicals and allied products, and paper products would be the largest

dollar gainers.

Table 3

U.S. Export Gains from CAFTA-DR Tariff Elimination

Millions of Dollars

U.S. Exports,

$ Millions

Applied

CAFTA-DR

tariff,

%

Gain from

tariff

elimination,

$ millions

Percentage

Gain,

%

Paper and wood products .............................................................. 757 10 141 19

Tires and other rubber products ................................................... 212 10 43 20

Metals ............................................................................................ 247 6 40 16

Chemicals, including photography supplies ................................. 1,431 5 159 11

Motor vehicle and parts ................................................................ 449 11 112 25

Transportation & Equipment ......................................................... 182 4 13 7

Non-electric machinery .................................................................. 1,281 4 104 8

Electric Machinery .......................................................................... 2,597 4 176 7

Mineral Products ............................................................................ 980 4 60 6

Manufactured articles not specified elsewhere ............................ 1,248 7 203 16

Total, excluding textile and apparel .............................................. 9,382 1,051 11

See Methodology section for sources and other information.

These exports would not displace local production in the CAFTA-DR countries, but

would instead displace imports into the region from producers in countries that

would still be subject to the full import duties assessed by the CAFTA-DR countries.

The model’s estimates are for export gains after all tariffs are eliminated. As not

all CAFTA-DR tariffs on manufactured goods would be eliminated immediately, the

above estimates are not a first-year result. Additionally, it is important to note that

these estimates are incremental to the base of U.S. exports—i.e., the model is not

estimating an absolute level of exports, but instead is estimating how much larger

exports would be with the tariff cuts than without them. The overall level of U.S.

exports, of course, depends on many factors, particularly the health of the CAFTADR economies.

BOUND VS. APPLIED RATES

A very important aspect of the agreement has been widely overlooked by most observers—the fact that the official tariff bindings—so-called ‘‘bound tariff rates’’ of

the CAFTA-DR countries are much higher than the statutory tariff rates they actually apply. This is not uncommon for developing countries, many of whom have unilaterally reduced the tariff rates they actually charge, while keeping their bound

rates at high levels.

Table 4

CAFTA-DR: Bound Tariff Rates

Bound Tariff

Rate

Costa Rica ................................................................................................................................................................ 44%

Dominican Republic ................................................................................................................................................. 35%

El Salvador ............................................................................................................................................................... 35%

Guatemala ................................................................................................................................................................ 41%

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Table 4—Continued

CAFTA-DR: Bound Tariff Rates

Bound Tariff

Rate

Honduras .................................................................................................................................................................. 32%

Nicaragua ................................................................................................................................................................. 41%

Source: World Trade Organization. Bound tariff data are unweighted averages.

The significance of this is a country may legally, under WTO rules, charge any

tariff rate it wishes, so long as it does not exceed its bound rate. Thus, if any of

the CAFTA-DR countries wished, they could raise their tariffs up to the extremely

high levels that are summarized in Table 4. As these are averages, some bound

rates will be even higher. For example, CAFTA-DR bound tariffs can be as high 50

percent on transportation equipment. Without the CAFTA-DR agreement, U.S. exporters would have no recourse against countries’ raising their applied tariffs. The

CAFTA-DR agreement, however, would commit these countries to maintain zero duties on U.S. products even if they hiked their applied tariff rates up to their bound

tariff levels.

In such a case, other exporters to the CAFTA-DR countries would have to pay the

higher tariffs, while U.S. exporters continued to have duty-free access. This guarantee is of substantial value. U.S. bound and applied rates are virtually identical,

as is typically the case for industrial countries, so there is no U.S. obligation here.

NON-TARIFF EFFECTS

The second effect on U.S. exports stems from liberalization of non-tariff barriers

and improvements in trade-facilitating rules and policies. These include express delivery, customs clearance, intellectual property protection gains, etc. For example,

the agreement requires that customs processing be accelerated and imported goods

be able to clear customs within 48 hours to the extent possible. Advance customs

rulings, transparent publication of customs rules, and other trade facilitation steps

will lower the cost of processing exports.

The technical barriers to trade provisions are expected to reduce arbitrary rulings

on standards. The agreement increases the likelihood that U.S. standards and conformity assessment procedures will be more broadly accepted, which will reduce

costs in the chemicals, machinery, and other areas. Smaller U.S. exporters will benefit disproportionately. Additionally, the agreement improves the ability of U.S. exporters to switch distributorships, which is presently difficult to do in some of the

countries.

These improvements will result in expanded exports, but there is no economic

model to estimate the amount of the gain. After consultation with knowledgeable

NAM members, we believe these gains may be equivalent to a further 5 percent reduction in the total cost of providing exports into the CAFTA-DR markets. While

the effects are real, and in some instances may rival the size of the tariff effects,

there is no reliable way of quantifying the non-tariff benefits.

EXPORT PRESERVATION

By far the largest effect on U.S. exports would be the preservation of some or all

of existing U.S. exports to the CAFTA-DR countries that otherwise would be lost

if Asian countries displaced current CAFTA-DR country apparel exports to the

United States. This effect could be as large as $4 billion of U.S. exports.

As the CAFTA-DR countries do not have large currency reserves or borrowing capacity, the amount they can buy from the United States and other countries depends on how much foreign currency they can earn.

The region has four significant sources of foreign exchange—exports of goods, remittances from workers who have migrated to the United States, tourism earnings,

and investment inflows. If CAFTA-DR country exports of apparel to the United

States were to be displaced by Asian-made apparel, none of the other three sources

would automatically increase to make up for the loss of export earnings.

Thus, for every dollar of apparel exports the CAFTA-DR countries lose to Asian

competitors, they will have to cut their imports by a dollar. If they were to lose all

$10 billion of apparel exports they currently sell to the United States, they would

have to cut their global imports by $10 billion. Since over 40 percent of what they

import comes from the United States, it is obvious this is a matter of some consequence to U.S. exports.

74

Most observers believe that in the absence of the CAFTA-DR agreement, the region risks losing all or most of its apparel industry. The cause of this loss is the

January 1, 2005, expiration of the global textile quotas that had been permitted by

World Trade Organization (WTO) rules. Analyses by the International Monetary

Fund, the World Bank, and others indicate China’s costs are lower than all other

producers and in the absence of quota restraint would be able to put most producers, including those in the CAFTA-DR region out of business. Even analyses performed by such anti-trade agreement organizations as the Global Trade Watch state

that without the CAFTA-DR agreement, the region’s apparel production cannot survive.

The U.S. International Trade Commission’s (USITC) analysis of the CAFTA-DR

agreement indicates that implementation of the CAFTA-DR agreement will provide

enough added advantages to enable the region’s producers to maintain their exports

to the United States and avoid the loss of its industry. The USITC does not foresee

a significant net increase in imports into the United States resulting from the

CAFTA-DR agreement, and states that any increase in the region’s exports to the

U.S. market likely would be in lieu of other imports into the United States. In fact,

as noted earlier, the USITC analysis sees a small ($20 million) positive net export

effect in this sector.

Thus, if without the benefit of the CAFTA-DR agreement’ preferences, CAFTA-DR

producers were unable to compete with Chinese producers and lost their entire U.S.

market, their exports to the United States would fall by $10 billion. As earlier

noted, the United States has more than a 40 percent share of their imports, so our

exports to them would be expected to fall by about $4 billion.

There would not be an offsetting increase in U.S. exports to China. This is because while the CAFTA-DR nations spend virtually everything they earn, China

does not. Rather than utilizing its U.S. dollar earnings to purchase U.S. goods or

services, China instead uses them to build up its foreign currency reserves to keep

its currency undervalued and implement its export-led growth policy. In 2004, for

example, China added to its currency reserves by $200 billion, even while it earned

a $162 billion merchandise trade surplus with the United States. China now has

currency reserves of $600 billion, 40 percent of its entire annual production of goods

and services.

The NAM’s calculations for the relationship between exports and U.S. employment indicate that currently about 12,000 jobs are associated with every $1 billion

of exports, as was noted earlier—meaning that if there were a $4 billion drop in

U.S. exports, about 48,000 U.S. job opportunities would be eliminated. Many would

probably be in the U.S. textile industry, since the CAFTA-DR region is one of the

only large purchasers of U.S. textiles—which they must use to obtain most of their

tariff preference privileges. Losses, however, would also occur in other sectors as

well.

It should be stressed that the NAM is not making any forecast of its own with

respect to the degree to which the CAFTA-DR countries can preserve their sales to

the United States under the CAFTA-DR agreement. For purposes of the analysis,

the NAM relied on the USITC’s estimates of the effect of the agreement on the region’s garment industry. The NAM also accepts, at the other end, the widely-held

view that without the agreement, their apparel industry has little, if any, hope for

survival.

Thus the maximum effect on preserving U.S. exports is calculated by the difference between the CAFTA-DR producers being able to keep their present $10 billion in annual apparel exports to the United States or entirely losing their markets

to Asian—and particularly Chinese—producers. Certainly the CAFTA-DR agreement is the best hope for the region’s producers. If, however, the agreement were

not sufficient to enable them to maintain their sales, then of course, the figures for

the preservation of U.S. exports would be proportionately smaller. For example, if

only half their sales were preserved, then the differential effect on U.S. exports

would be half the maximum depicted in this paper.

ECONOMIC EFFECTS ON CAFTA-DR COUNTRIES OF LOSING APPAREL EXPORTS

As part of the analysis, the NAM considered some of the domestic economic effects

in the CAFTA-DR region if they were to lose their apparel industry to China or

other Asian nations. Even a cursory look shows that the effects on their economies

would be severe.

The NAM’s analysis shows that there are about 550,000 people working in Central America’s apparel industries. Were the industry to see its exports to the United

States displaced by Asian producers, most—if not all—of these jobs, which are

among the highest-paying in the region, would disappear. As shown in Table 5, the

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job losses would raise the overall official unemployment rate in the region to 17 percent.

The actual job losses would be higher if the apparel industry disappeared, for support jobs in other industries—e.g., transportation services—would disappear as well.

Additional jobs would be lost in the service and other industries as the former apparel workers no longer had income with which to purchase goods and services. The

NAM has no estimate for the size of this ‘‘multiplier’’ effect in the CAFTA-DR countries, but by way of order of magnitude, if the multiplier were the same as in the

United States, an additional 275 thousand workers would become unemployed, increasing the region’s unemployment by over 800,000 and implying an unemployment rate of 18 percent.

Table 5

CAFTA-DR Unemployment, Assuming Loss of Textile/Apparel Industry

Current Unemployment,

thousands

Unemployment Rate

%

Textile/Apparel

Employment

thousands

Prospective

Unemployment,

thousands

Prospective

Unemployment,

Rate, %

CAFTA-DR .............................................................. 2,063 14 549 2,612 17

Costa Rica ............................................................. 118 7 45 163 9

Dominican Republic .............................................. 404 17 138 541.5 22

El Salvador ............................................................ 170 7 91 261 10

Guatemala ............................................................. 288 8 122 410 11

Honduras ............................................................... 663 28 107 770 32

Nicaragua .............................................................. 420 22 46 466 24

Source: Overall employment data from CIA World Factbook, for 2003. Textile/apparel employment data are latest available, from USITC coun- try studies.

Moreover, CAFTA-DR’s apparel exports account for a surprisingly large portion of

the region’s entire Gross Domestic Product (GDP). Their net exports of apparel to

the United States of about $5.5 billion are equivalent to 7 percent of their combined

$77 billion GDP—the sum total value of all goods and services produced in the region.

A 7 percent drop in GDP would put the region into a serious recession. Such a

decline would be two and a half times as large as the deepest recession the United

States has had in the last 50 years (1982’s 2.6 percent drop). The political stability

consequences in the CAFTA-DR countries of having 550 thousand or more people

become unemployed and enduring a 7 percent decline in GDP with little prospect

of recovery are self-evident.

Table 6

CAFTA-DR Gross Domestic Product, 2003

(Billions of U.S. Dollars)

Total ......................................................................................................................................................................... $77

Costa Rica ................................................................................................................................................................ $18

Dominican Republic ................................................................................................................................................. $16

El Salvador ............................................................................................................................................................... $13

Guatemala ................................................................................................................................................................ $20

Honduras .................................................................................................................................................................. $7

Nicaragua ................................................................................................................................................................. $4

Source: International Monetary Fund.

The CAFTA-DR countries are already highly dependent on remittances. For example, in El Salvador remittances are 15% of its GDP. An Inter-American Dialogue report found that the CAFTA-DR countries received $9 billion in remittances in 2003.

While this counter-cyclical flow would surely rise in the event of massive layoffs in

the CAFTA-DR region, the present numbers indicate that migrants are already

hard-pressed and increases are likely to be small.

EFFECT ON U.S. IMPORTS

Turning to U.S. imports, the analysis indicates the CAFTA-DR agreement is unlikely to generate significant new imports to the United States. The primary reason

for this assessment is that the CAFTA-DR countries have been enjoying preferential

76

access to the U.S. market under a variety of special programs such as the Caribbean

Basin Trade Partnership Act (CBTPA).

Fully 80 percent of their exports to the United States already enter duty-free

under these programs. Moreover, outside the textiles and apparel industries, 95 percent of CAFTA-DR exports already enter the U.S. market duty-free. Thus they will

obtain little new U.S. market access. The key benefits to the region lies in the greater ability to withstand Chinese and other Asian nation competition in the apparel

area, and the fact that their access to the U.S. market will be permanent and not

dependent upon possible changes in U.S. legislation or policies.

Table 7

Proportion of U.S. Imports from CAFTA-DR Currently Entering Duty-Free

(Percent)

All Imports ................................................................................................................................................................ 80

Manufactured Goods ................................................................................................................................................ 77

Textiles and Apparel ................................................................................................................................................. 68

Other manufactured goods ...................................................................................................................................... 95

Source: United States International Trade Commission.

Certainly the improved investment rules, better rule of law, greater protection of

intellectual property, better-functioning services markets, and other structural improvements that the countries will make under the agreement are likely to improve

their business and labor climate and have a positive effect on U.S. and other investment in Central America.

However, fears that a flood of U.S. investment will pour into the CAFTA-DR region and ‘‘outsource’’ U.S. jobs are unfounded. First, it is important to understand

that at the present time there are no restrictions on U.S. investment into the region.

American companies have been free to invest.

Second, three of the countries already have Bilateral Investment Treaties (BITs)

with the United States that provide U.S. investors with substantially the same benefits as the FTA would.

Third, it is important to understand just how small the CAFTA-DR economies are.

Together their production of goods and services (total GDP) is only $77 billion. This

is a tiny fraction of U.S. production. To be precise, their combined GDP is seventenths of one percent (0.7 percent) of U.S. GDP or the size of Sacramento, California. Even investments significant to their economies would be small in scale to

present trade flows.

Finally, any increased investment in the CAFTA-DR region is most likely to be

in product areas that would otherwise see imports into the United States from Chinese or Asian production—rather than displacing U.S. production. As noted earlier

in this analysis, U.S. imports from the CAFTA-DR region would result in greater

U.S. exports than if the production were in Asia.

Thank you again Mr. Chairman and Members of the Subcommittee. I appreciate

the opportunity to express my views, and those of the National Association of Manufacturers about the importance of CAFTA-DR.

Mr. STEARNS. I thank the gentleman. I will start with my questions first. Mr. Kearns, you have made quite a bit about the deficit

in our trade, but isn’t it also true that deficit relative to GDP is

really what you should be talking about? Because if you compared

deficits 20 years ago with deficits today, you have a much bigger

GDP. So it is all relative to what you are doing in business.

Wouldn’t you admit that that is a factor? This is just a minor point.

It is just——

Mr. KEARNS. Yes, it——

Mr. STEARNS. [continuing] because I think every Member of Congress struggles, what do deficits mean? Not just for the budget but

also for trade. And, you know, so I think your emphasis on these

deficits, as Mr. Vargo has pointed out, is not in the area where we

are talking about, but it is European Union where we are probably

buying all their BMWs and buying all their Porches and Mercedes

and so forth, so, you know, it is just a thought.

77

Mr. KEARNS. Well, I think the trade deficits are—Mr. Vargo has

said that trade agreements are the way to solve these problems,

but the point I am making is that they are not working to solve

those problems because the trade deficits would be dropping, regardless of their share of GDP. If in fact these trade agreements

were effective in opening foreign markets full to U.S. products, we

would exporting a lot more and importing a lot less——

Mr. STEARNS. Okay.

Mr. KEARNS. [continuing] and in fact trade is a—the rest of the

world approaches trade as a zero sum game, get your products into

the U.S. market, keep out U.S. products to the extent you can. So

it hasn’t been a win-win solution, and it is a symptom of a larger

problem. And the trade agreements are clearly ineffective in getting a greater balance in trade.

Mr. STEARNS. The United States International Trade Commission did a study. They estimate that under CAFTA, imports from

the area would go up about 12 percent, $2.8 billion, while exports

would go down roughly 15 percent, $2.7 billion. Does your organization dispute those numbers? Because it looks like a wash to me.

Mr. KEARNS. Yes, essentially, it is a wash. The point is——

Mr. STEARNS. Do you dispute those numbers? Do you accept

those numbers?

Mr. KEARNS. I just said it is a wash, sir.

Mr. STEARNS. Okay. Okay.

Mr. KEARNS. I agree.

Mr. STEARNS. Okay. Okay. Ms. Lee, you know, just as a person

when looking at this, not knowing about the agreement, and Ms.

Vargo said right now the tariffs are set up so that they can send

everything into us with no tariffs, but we can’t send it to them. So

just you would say by golly, any kind of an agreement that would

allow you to get into their markets with no tariff has got to be good

just on that basis. And then, as Mr. Vargo said, we thrown in some

labor agreements and we make particular set-ups for maybe the

controversial items, it seems on the outset that this agreement

would be better than no agreement, because right now they come

in here free of charge and we can’t get into theirs. So what is

wrong with trying to set up some kind of agreement where we can

get into theirs?

Ms. LEE. No, I think the idea of getting extra market access is

always appealing. The question is, first of all, as Mr. Vargo said,

this is a very small market. And so getting addition, incremental,

a few percentage points different in the tariff you pay in a very

small market is not going to be economically all that meaningful

for the United States. And if the conditions attached to it are inadequate and wrong, and I guess I would argue—I completely disagree with Mr. Vargo and Mr. Cohen about whether the labor

rights provisions are a step forward. We see them, and we are the

ones who live with these——

Mr. STEARNS. You think they are a step backward?

Ms. LEE. We think they are a definite step backwards.

Mr. STEARNS. Separate the labor conditions——

Ms. LEE. Yes.

78

Mr. STEARNS. [continuing] and I know it is going to be hard since

you represent the AFL-CIO, but wouldn’t you agree that this agreement would help us sell to Central America?

Ms. LEE. Not to a large extent. I mean, I think there is probably

some small increase in sales to Central America, but, and I think

this is really the issue that Mr. Kearns was getting at also, that

to the extent that American companies don’t have an export strategy from the United States for the large part, that they have an

outsourcing strategy, that they have been serving foreign markets

by moving production there, and they are serving the U.S. market

by moving production offshore, taking advantage of low-paid labor

and workers who lack basic rights, who don’t have the right to organize unions.

So to the extent that these trade agreements are much more

about facilitating the mobility of capital than they are about facilitating mobility of goods. It ends up in the end—even though—that

was very true of NAFTA. The figures were that U.S. goods faced

about a 10-percent tariff going into Mexico, and Mexican goods

faced only a 2.5-percent tariff coming into the United States. So

you would think that if you take those tariffs down to zero that

U.S. producers would be the winners. But it is not as simple as

looking at the tariffs. And that is the point that we are trying to

make in the Central American context. And the investment rules,

the intellectual property rights rules, the government procurement

rules, and the services rules are also problematic in our view. So

the set of rules together don’t justify the small additional market

access.

And just one word on the ITC studies is that those studies were

wrong in the case of NAFTA.

Mr. STEARNS. So you don’t agree with Mr. Kearns?

Ms. LEE. I don’t.

Mr. STEARNS. He said it is a wash. You say that the study was

wrong.

Ms. LEE. I don’t believe that CAFTA is going to be economically

devastating to the United States. It is small.

Mr. STEARNS. I mean, obviously, as Mr. Cohen said or Mr. Vargo,

this is Sacramento. So, I mean——

Ms. LEE. It is not economically devastating, but it is also not

going to be our savior. It is not going to create——

Mr. STEARNS. No, but it might be symbolic. It might be geopolitical and——

Ms. LEE. It is——

Mr. STEARNS. [continuing] and also I understand there is a lot

of U.S. industry unionized support for this agreement. I mean, you

hear the folks from Michigan talking about over a 10-year period

they will be able to sell more cars at really——

Ms. LEE. There is not a lot of U.S. unionized support for CAFTA.

Certainly, the United Auto Workers, the steel workers, the machinists, the apparel workers, we have got a fair amount of unanimity

within the U.S. labor movement opposed to CAFTA.

Mr. STEARNS. Okay, Mr. Vargo, is there anything that Ms. Lee

said that you would like to respond to. I am trying to——

Mr. FRANK VARGO. Well——

79

Mr. STEARNS. [continuing] understand this in a very simplified

way.

Mr. FRANK VARGO. Yes, that has become very popular now to say

these are——

Mr. STEARNS. I think you have to turn your mike on I think.

Mr. FRANK VARGO. It has been very popular these days to say

these are outsourcing agreements. They are not outsourcing agreements. There is nothing that has prevented any American company

from investing in Central America. Half the countries already have

bilateral investment treaties with us. This is about lowering their

tariff rates. Why would the NAM care about lowering tariff rates

if we just wanted to outsource? One quick point on NAFTA; we lost

three million manufacturing jobs between 2000 and 2003. Three

million. Do you know how much our imports from Mexico of manufactured goods rose in those 3 years, Mr. Chairman? Zero. They

fell. These are not outsourcing agreements. Now, sure, some plants

move to Mexico. Others expanded and exported to Mexico.

We want this agreement because we want those barriers down

because we want to sell to them.

Mr. STEARNS. My time has expired. Ms. Schakowsky.

Ms. SCHAKOWSKY. Well, Mr. Vargo, I feel that I have been called

a bad neighbor. I feel that I have been called a chicken, afraid of

negotiating agreements with these little countries. You said that

the sugar industry should say a big thank you for what they have

gotten in this and that it is good for us and good for them. And

my real question is who is the ‘‘us’’? You know, I have no problem

with you coming here and arguing a case for the National Association of Manufacturers. But I do have to say that I take exception

for your arguing on behalf of the workers in this country or in

those countries. We have other people who are here to presumably

argue their own self-interests. And I would hope that you presume

that they understand their self-interests.

And I would say that to Mr. Cohen too. If you want to argue on

behalf of your members, that, it seems to me, is what this is for.

But for you to come and tell us about why organized labor, why

working people are wrong about what they believe to be their own

self-interest is something else. And I would agree that some of your

members may benefit very much. Your bottom line may be better

and you may argue that ultimately, that is good for the United

States of America.

I, for one, am concerned about the workers in my district, and

I am also concerned, having traveled to Ciudad Jua ́ rez and seen

workers living in the packing crates of the items that they are

manufacturing when their employer is a U.S. company that crossed

the border. I am worried about the impact that our trade agreements are having. On this side of the border, the lost jobs, and on

the other side of the border. And I, for one, am less concerned

about the bottom line of your members. That is a legitimate concern. But it is not my primary concern.

So I wanted to go back to Ms. Lee to talk a little bit about the

situation with these labor agreements. But I also wanted you to defend—I think Mr. Vargo made a strong argument in saying this is

not an outsourcing piece of legislation or agreement, but rather—

so if you would talk about both the labor agreements. But also first

80

to address it. That it is not outsourcing, that in fact we are talking

about the interest of lowering the trade barriers.

Ms. LEE. Thank you very much, Congresswoman. And in terms

of the outsourcing agreement, I guess there are some key differences, key things that changed. Certainly, the investment protections are things that I know multinational corporations do look

at whether—if you are reducing the riskiness of moving production

to another country, and you are locking in the lower tariff barriers,

that does make it more attractive to move the production there.

You have guaranteed your access back into the United States market and maybe even guaranteed the lower tariffs on your inputs

that move back and forth.

In terms of whether these agreements are outsourcing or not, I

think that—I will say two things in terms of NAFTA, first of all,

that a couple of years after NAFTA there was a follow-up and went

back to a lot of the companies that argued for NAFTA—Allied Signal, Procter and Gamble, Eastman Kodak—and asked them how

many jobs did you create in the United States through your increased exports to Mexico and Canada? And those companies were

almost to the one unable to come up with very many jobs, five here,

six there, small numbers. On the other hand, almost all of those

companies had in fact moved production to Mexico in the years following NAFTA’s implementation.

The same thing was very true around the China PNTR. Remember, that debate also was about opening China’s market, making

sure that American producers and workers had a good chance to

sell more stuff to China, and yet again, when a ‘‘Wall Street Journal’’ reporter went to as many multinational corporations as she

could around the China vote and said how many of you are actually

planning to expand exports to China if PNTR goes through? She

couldn’t find a single one that would say they wanted to export

more to China. And yet every single one again had plans to move

production to China.

So this has been our experience of the American labor movement

that the trade agreements are sold as market opening agreements.

And in fact what we see is that they are used both at the bargaining table, when workers are trying to form unions, when they

are trying to bargain for decent wages and benefits and they are

told we can move to another country where workers don’t have the

right to form unions, where wages are much lower, where we don’t

have to worry about pesky workplace health and safety regulations,

the enforcement of environmental rules. And that is exactly what

our members experience every single day of the week with respect

to trade agreements. And that is why our folks are cynical and they

don’t believe the promises that have been made on behalf of the

trade agreements, because they simply have not seen them borne

out in their own lives, in their own workplaces, in their own communities.

Mr. KEARNS. May I make one additional point on outsourcing or

is that out of order?

Mr. ROGERS. Please.

Mr. KEARNS. Okay. Many of our members at U.S. Business and

Industry Council are suppliers of intermediate goods to larger

American corporations, multinational corporations. And I can tell

81

you there is extreme pressure to move to—has been extreme pressure over the last 12 years to move to Mexico, to follow the majors

if you are in the auto parts business or supplying parts for major

appliances, for instance. The GM plant in Shanghai, the Buick

plant there, one of our members bid on a contract and he was told

well, you won the bid, you are the low man, but you have to take

a Chinese partner, and over 5 years you have to transfer all of your

technology to them. Well, at the end of 5 years, guess who is going

to be supplying that plant. And it is not going to be from Tennessee. It is going to be from some local Chinese supplier. So I

would dispute Mr. Vargo’s assertion that these are not outsourcing

agreements.

If you looked at PNTR for China, we did a survey of the

websites, the top 50 Fortune 500, the ones that are involved in

manufacturing, they all had plans to move factories to China, not

to sell goods out of U.S. factories to China. And when they moved

those factories to China, the whole supply chain in this country is

disrupted, and the American companies supplying them either

have to follow them or are forced to transfer technology to a Chinese partner, a joint venture partner, et cetera. Thank you.

Mr. COHEN. Mr. Chairman, may I just make one comment?

Mr. ROGERS. Please.

Mr. COHEN. Simply on this larger issue of companies’ involvement overseas, we have done quite a few investigations, as well, of

what the consequence is of investment overseas by U.S. companies.

And there is a conclusion that has come out again and again, and

the conclusion is that as companies invest more and more overseas,

they have a greater level of activities here at home. Were they to

have less activity overseas, invest less, they would have fewer activities here at home. And in that sense it is not a substitution. It

is complementary. And when you actually look at what companies

produce overseas, the lion’s share of what is produced overseas is

sold overseas.

Similarly, if you look at where U.S. companies export their products and they produce them in the United States, the largest single

purchaser of U.S. product that is produced here in the United

States are the subsidiaries and affiliates overseas of U.S. companies.

Mr. ROGERS [presiding]. And not because I am sitting in the

chair but apparently I am next on the list, a couple of quick things,

Mr. Kearns. China is not covered in the NAFTA agreement, correct? I mean, the example used was Shanghai. You mentioned Mexico and China in the same breath. I mean, just for the sense of

clarity, we don’t have a free trade agreement with China.

Mr. KEARNS. No, they are part of the world——

Mr. ROGERS. I just wanted to make that very, very clear.

Mr. KEARNS. There is not a bilateral free trade agreement with

China, correct.

Mr. ROGERS. And I have the same concerns, being from Michigan, about coercion of placement of supply—absolutely, but we

need to be very clear about this, that we have no free trade agreement with China, which is a very common misconception, at least

where I come from. NAFTA and China, in my estimation, are two

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very distinct sets of problems that we need to address just for a

point of clarification.

Mr. Vargo, you cited an interesting figure that I think is important. Two-thirds of all your manufacturing growth came from exports. Did I understand that correctly?

Mr. FRANK VARGO. I must have misspoken, Mr. Rogers. What I

meant to say was that two-thirds of our entire growth of manufactured exports to the whole world since 1997 has come from

NAFTA.

Mr. ROGERS. That is interesting.

Mr. FRANK VARGO. And——

Mr. ROGERS. You mean exported to NAFTA co-signatures, is that

correct?

Mr. FRANK VARGO. To purchasers in NAFTA.

Mr. ROGERS. Okay.

Mr. FRANK VARGO. Two-thirds of our entire—well, one-third to

Mexico. In fact the increase to Mexico was almost as large as to

all of the countries with which we don’t have trade agreements.

Mr. ROGERS. Can you put that in a—that has a huge job implication, does it not?

Mr. FRANK VARGO. Yes, it does.

Mr. ROGERS. I mean, one-third of all—this sounds kind of complicated, but what does that mean in actual jobs? Can you give me

an understanding?

Mr. FRANK VARGO. Our exports of manufacturers to Mexico are currently running over $100 billion. I mean, you can figure 12,000

jobs per billion. So there is a lot there. But can I make one point

on Mexico——

Mr. ROGERS. Sure, please.

Mr. FRANK VARGO. [continuing] which NAFTA has been impugned a lot, and it was said, you know, if these things worked,

our trade deficit would fall. You know, anyone who would like to

check the figures can see that our manufactured goods trade deficit

with Mexico last year in 2004 was smaller than it was in 2002

while it exploded with the rest of the world. Two-thirds of our deficit is with Asia. And, Mr. Rogers, I know how concerned you are

about the Chinese currency. That is where our problem is.

Another problem I have with people going on NAFTA, NAFTA,

is they are barking up the wrong tree and they are preventing us

from getting to the real problem, which is, within the system, we

have got to find a way to solve those Asian currency problems, or

our deficit is just going to get totally out of hand. It is plenty big

enough now. Thank you.

Mr. ROGERS. And I agree 100 percent on this currency manipulation. It is a huge problem that we must——

Mr. FRANK VARGO. It is.

Mr. ROGERS. [continuing] address. It is one of the areas that we

are wholly uncompetitive on American manufacturers. It has nothing to do with any trade agreement other than it is bad economic

policy.

Mr. FRANK VARGO. I don’t know if you can find jurisdiction, this

subcommittee, but I would love to have a hearing on it.

Mr. ROGERS. We are working on it. Trust me on that one. And

now that I am sitting in the chair, can I make that pledge right

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now? Also, I think it is important to point out—and I don’t know

the exact number—I want to say two-thirds. That may be wrong.

You can help me here. One of the things with global competition,

American manufacturers got more innovative and more productive.

Didn’t we lose about two-thirds of those jobs through productivity

increases and not necessarily moving companies offshore?

Mr. FRANK VARGO. Probably not that high, but a lot. Our productivity growth has been astonishing. But as far as trade goes, you

know, we had a worsening of about $100 billion in our trade deficit

in those 3 years. But about $80 billion of that worsening was because our exports fell. And our exports fell because the dollar was

allowed to get out of line. So we take the export fall and you take

the productivity and the decline of the domestic economy, you have

got the vast bulk of it.

Mr. ROGERS. Talk to me about enforcement. I know that the National Association also has some concerns about enforcement.

Mr. FRANK VARGO. Yes, sir, we——

Mr. ROGERS. What do you think that we can do on the enforcement side, either in Congress or through the administration to

make sure that these are truly fair and free trade agreements?

Mr. FRANK VARGO. Two things in my view—and for full disclosure I will say that I had 30 years at the Commerce Department,

and part of my time there was in setting up a compliance center

at the Commerce Department—I would like to say three things actually. One, I would like to see a strong inter-agency committee on

enforcement and compliance so the agencies would all really get in

line to work together. Second, I would like to see some more enforcement resources, but third, I would like to see investigatory resources because we have so many smaller companies that say I go

to the government; they say well, prove it. Well, I can’t go to China

and document everything. There is no way I can do that. So, in essence, a lot of smaller companies are left outside the system. So I

would hope that we would look at how can we increase the resources that go to investigation. Commerce has set up one unit. We

haven’t seen that much out of it yet. We would like to press for

more.

Mr. ROGERS. I think those are great suggestions, and I think,

hopefully, we can work together and find some common ground on

that on both sides of the aisle on that particular issue. I see that

my time is up, and I would now recognize Mr. Brown.

Mr. BROWN. Thank you, Mr. Chairman. Mr. Vargo talked about

the expansion of all the exports from the United States to Mexico,

understanding mostly though the great—overwhelming percent of

those exports were either equipment to build factories in Mexico or

what some have called industrial tourists. They are components

that go to Mexico and then return quickly to the United States as

assembled products.

And I would just show this chart here that none of these countries in Central America, just like Mexico is not buying consumer

goods. None of these countries can afford to buy a car from Mr.

Rogers’ district, can afford to buy steel from West Virginia, can afford to buy textiles, by and large, from North and South Carolina

and Georgia, can afford to buy from Seattle, buy any kind of software. I mean, it is just pretty clear that these are not countries

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that are going to be able to consume, to buy American exports as

Mr. Kearns was saying.

Another point before I have a question for you, Mr. Kearns. You had said that—I have heard President Bush the first say that $1

billion in imports or exports translates into 18,000 jobs. Your number was 12,000. Either way you were talking about how this means

more jobs for the United States. Conversely, when you have a $600

billion trade deficit, if you multiply that times 12,000 jobs, because

if you are going to multiply it one way, you are going to multiply

it the other way—I can’t even add that high, but 12,000——

Mr. KEARNS. It is eight million. It is——

Mr. BROWN. It is obviously an awful lot of job loss, and so I think

you made that point pretty well. Mr. Kearns, I have a yes or no

question for you because of the shortness of time. The only penalties we talked about earlier Ms. Schakowsky first brought up for

violating CAFTA’s labor and environmental provisions is a fine

capped at $15 million. In contrast, violations of CAFTA’s commercial provisions result in unlimited trade sanctions, a much more

drastic and effective tool. My yes or no question for you is penalties

for violations of the commercial and IP provisions of CAFTA were

the same as those for labor and environment provisions, capped at

$15 million fines, would NAM still support CAFTA?

Mr. FRANK VARGO. I am sorry. What was the question?

Mr. BROWN. The question was that if the penalties for violations

of commercial and IP—if the penalties for those provisions were the

same as those for labor and environmental provisions, that is,

capped at $15 million rather than trade sanctions, would NAM still

support CAFTA?

Mr. FRANK VARGO. Well, I think that the sanctions should be appropriate to the——

Mr. BROWN. Would you give me a yes or no on that? Is that possible?

Mr. FRANK VARGO. It is not possible.

Mr. BROWN. Okay. All right, then. I have a couple of questions

for Ms. Lee. Several of CAFTA’s supporters cite the report from the

International Labor Organization on Central American labor laws

and enforcements. When I hear some of the supporters of CAFTA

toasting an ILO report, it piques my curiosity for sure. People keep

saying the report says CAFTA countries’ labor laws meet ILO

standards. Would you both discuss that whether in fact they do.

And second question, would you comment on Mr. Cohen’s comments—and I believe Mr. Vargo weighed in too—on the whole issue

of these labor provisions in CAFTA being actually stronger than

labor provisions in the Jordan agreement? Thank you.

Ms. LEE. Thank you very much. We read that ILO report pretty

closely, and it is written like all ILO reports, in very careful language. But it found about 27 different ways in which Central

America’s labor laws do not in fact meet ILO standards. Now we

can argue about whether those are important ways or not important ways, but I think it is not accurate to say Central America’s

laws meet ILO standards. They don’t, and in fact those 27 different

deficiencies in Central America’s labor laws haven’t been corrected.

And there is no move to correct them. And if CAFTA is passed

there will be no incentive to correct them.

85

And, you know, we talk every day with Central American trade

unionists, and they tell us the deficiencies in their labor laws are

real.

There are also problems with enforcement. Those are both issues

there. But the deficiencies in the labor laws create loopholes where

workers who try to organize unions simply can’t register their

unions, they get fired, and there are no penalties. There are no

adequate penalties. Those are things that need to be fixed in Central America’s labor laws. And the kind of vague language written

into constitutions that say we support labor rights is almost irrelevant in that context.

The CAFTA doesn’t just clarify the Jordan standard. The Jordan

standard has three labor provisions: to respect and affirm the ILO

obligations under the Declaration of Fundamental Principles and

Rights at work, to enforce your own laws, and not to derogate from

your laws in order to increase trade. And CAFTA explicitly makes

the first and the third of those, the commitment to meet ILO

standards and the commitment not to derogate not subject to any

enforcement whatsoever. That is not a clarification.

Under the Jordan agreement it is possible to bring dispute settlement over whether a country is in fact meeting ILO standards,

whether their laws meet ILO standards or not. It might be that it

would be unlikely that that would happen, and I would argue that

it is unlikely, that, you know, if a madman takes over the country

and bans union, we would be able to bring a dispute settlement

case saying that that country was not in fact striving to ensure

that its laws met ILO standards. It was not in compliance with

that.

And in terms of the different dispute settlement mechanisms, I

was astounded to hear Ms. Vargo say that the GSP provisions are

a sledgehammer, and she much prefers the weak CAFTA labor enforcement provisions where there is essentially the ability to pay

a fine to yourself is what the CAFTA labor rights enforcement provisions include. And only if you don’t pay that fine to yourself does

a trade sanction come into play.

Now, trade sanctions, the withdrawal of trade benefits when a

country is not in compliance with its obligations under trade agreements is how we enforce all of our trade laws. All of the things of

importance to Mr. Cohen and Mr. Vargo are enforced through the

threat of withdrawing trade benefits. And we have denied ourselves

the use of that very important tool for labor right enforcement in

the CAFTA, and we have completely denied the ability to challenge

a country’s labor laws, the adequacy.

And in Central America where workers are fired almost every

day for trying to organize unions sometimes face violence, and the

reprisals against trade unionists are very extreme. We feel that the

laws need to be improved, we need protections against weakening

those laws, and we need effective enforcement of those laws. We

have none of those under the CAFTA labor chapter.

Mr. COHEN. Mr. Brown, may I just——

Mr. FRANK VARGO. May I be permitted a quick technical comment?

Mr. COHEN. Just a——

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Mr. FRANK VARGO. Let me do this. It is important to understand

that while the CAFTA agreement has teeth, the Jordan agreement

has no teeth. Because if you read the dispute settlement part it

says this is non-binding. It doesn’t mean a thing. And also, both

parties to the dispute have to agree to allow a panel to be created.

And if they don’t, it will never be created because there are no time

limits on it. But the CAFTA agreement does have the dispute settlement built right into it.

Mr. COHEN. The one other point, if I may, Mr. Chairman, is to

mention why the enforce-your-own-law standard is incorporated in

the FTA with the countries of Central America. And it really goes

back to the direction of you, the Congress, in the 2002 Trade Act.

That was the direction that you gave the negotiators when they

were going to go forth and negotiate trade agreements around the

world. It was to be an enforce-your-own-law standard. There had

been a consideration of requiring each of the free trade agreements

to incorporate the core ILO labor standards. That was looked at by

the Congress; it was not adopted. And that is really the basic reason why this standard has been—Congress itself is the one that requested it.

Mr. BROWN. Mr. Cohen, I would add, the Congress that did in

fact—was included in the Trade Promotion Authority Bill, but it

also passed literally in the middle of the night with the role call

staying open for an hour and a half by two votes, just for your information.

Ms. LEE. Congress also instructed the administration to have

equivalent dispute resolution for labor and environment for all the

principal negotiating objectives. In our view that is not——

Mr. ROGERS. I am just going to cut—this is not a debate with the

panelists, although intriguing and as interesting as that might be.

Mr. Gonzalez.

Mr. GONZALEZ. Thank you, Mr. Chairman. My first question is

to Mr. Kearns, and I do want to have enough time to ask Ms. Lee

what I think is a very important question because it is the most

troubling aspect of the treaty for me. Mr. Kearns, some would

argue that CAFTA is a way of dealing with the China problem.

Mr. KEARNS. Right.

Mr. GONZALEZ. All right. What I mean by that is that we do

something in our own hemisphere to strengthen everyone that obviously are our neighbors and stuff, and it is good neighbor policy,

but it may be good economic policy and strengthen everyone so that

we are in a more competitive mode because when you say fix the

China problem, you know, they are our creditor. They are the ones

that enjoy the trade deficit and such. In other words, they are in

a superior position in many ways, and it is worsening. But do you

see that a free trade agreement could be part of a policy of addressing what looms large in the very near future and that is China and

the changing global circumstances?

Mr. KEARNS. Well, I think there are better ways to address the

threat of China in terms of textiles and apparel than is laid out in

this agreement. There are a bunch of loopholes that the Chinese

may be able to take advantage of in yarn-forward and single transformation. According to the Mexican Chamber of Commerce, 58

percent of all the clothing sold in Mexico is smuggled in from

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China. So China has set itself up over the past several years to do

what we see it doing since the MFA went out of existence at the

end of last year. It is just surging and taking enormous amounts

of market share here in the U.S.

It would have been prudent, if we could turn back the clock, to

look at the phase-out periods of the MFA to make it a 15-year as

opposed to a 10-year, et cetera. No one was looking when this stuff

was negotiated back in the Uruguay Round with setting up the

WTO. China wasn’t on anyone’s horizon, and the countries negotiating these things all thought well, we are just going to get increased share, access to the U.S. market at the expense of American companies. Now China is on the scene and it is a much different equation.

I think that the, you know, the whole notion that somehow these

roundtrip exports down there, about 35 percent or so of our exports

down there, $5 out of the $15 billion roughly speaking, are

roundtrip textile and apparel exports. I don’t see it as a way to, you

know, they may—some companies, American in the textile and apparel field, may do a little bit better for a short amount of time,

but there is just colossus. There is this 800-pound gorilla in the

room eating our lunch at the buffet and we are discussing the hors

d’oeuvres, as it were. It is not a good long-term strategy. I don’t

think it is——

Mr. GONZALEZ. And I need to move on to the next question.

Mr. KEARNS. Yes, sir.

Mr. GONZALEZ. And I do appreciate your concerns and your insight. Bottom line is always going to be who is our competition,

who is going to be basically our trading partners. And either we do

something in this hemisphere, and I am not really sure how we

would do it to better position ourselves, and everyone complains

when we attempt to do it. It just depends whose ox is being gored.

When labor is the greatest cost in all of your components in whatever you are manufacturing or producing, you are going to be at

a disadvantage whether it is Latin America or China.

And I guess I am just having a real difficult time in trying to

reach some sort of an agreement with at least those individuals

that have more in common with us, whether it is in this hemisphere and so on. Then maybe someone who is truly the greater

competition, such as China, and that remains to be seen on how

we get there.

Ms. Lee, I know I have just 1 minute left, but obviously I think

the chairman will allow you to answer this. And it goes back to the

labor provisions of CAFTA. And what you have already told me is

this: under what we call the GSP, there is greater ability for the

United States one, to identify what is less than satisfactory labor

practices, and then promote them because there are significant

sanctions or actions that the United States can take.

Under CAFTA what you do is you fine yourself, is that pretty

much it? It is also my understanding that the trade representative,

back in the Singapore and Chile pacts, identified the labor provisions as maybe in those particular treaties as maybe not applicable

to Central America and South America and so on. Yet, that is what

we have presently. Isn’t that true?

88

Ms. LEE. Yes, that is exactly right that early on in the negotiation process, USTR, Ambassador Allgeier said that the Central

American context was different, would require stronger labor provisions. And then they went ahead to negotiate the exact same, essentially, labor provisions.

And I think the point is that we are losing tools that we have

in place today, that we have the GSP tools and that the mechanism

of paying a fine that goes back to the country where the violation

occurred I don’t think would be seen as acceptable for commercial

provisions, for IPR.

And certainly if you take for example the case of Australia. We

negotiated a free trade agreement with Australia. Australia has excellent intellectual property rights laws, and yet it wasn’t considered that we didn’t need an IPR chapter with respect to Australia

or that we needed a provision that just said keep on enforcing your

own IPR laws. We put in the same IPR protections, very strong

IPR protections even in the Australia context because that is how

we do trade agreements when something matters.

And I guess what I would argue to you is the very weak and inadequate labor rights provisions in CAFTA show that this administration simply doesn’t care. It is not a high priority to protect workers’ rights, and so they put in place very weak provisions.

I wanted to say one word about China, which is that I think this

is a very important question, but it is essentially wishful thinking

that signing CAFTA is somehow going to help us compete with

China. We have $162 billion trade deficit with China. We have to

address directly—we need our own government, we need our administration to step up to the plate and address the currency manipulation, the illegal subsidies, and the egregious repression of

workers’ rights and human rights in China, because that is one of

our key trading partners.

And having a little bit more ability to assemble clothing in Central America is simply not going to address that China problem. It

is not going to help Central America. I know the Central Americans are very concerned about the end of textile and apparel

quotas, and we heard a couple of people say today that Central

Americans are going to lose half a million apparel jobs if CAFTA

doesn’t go through. There is no reason why that would be the case.

Central America still has the CBI provisions and could have those

indefinitely.

Mr. ROGERS. Thanks. Unfortunately——

Ms. LEE. And if there is time——

Mr. ROGERS. [continuing] I am going to have to——

Ms. LEE. [continuing] I have just one quick——

Mr. ROGERS. [continuing] make that the last word. I apologize.

We have yet another panel to get through. Thank you very, very

much for taking the time to be here. We appreciate your insight

and concern. Thank you very, very much.

Mr. COHEN. Thank you.

Mr. FRANK VARGO. Thank you.

Mr. ROGERS. The next panel is Jack Roney, is that correct?

Mr. RONEY. Yes.

Mr. ROGERS. John Murphy, Dr. Russell Roberts, and Mr. David

Waskow. Thanks for that quick transition. We are going to push

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on. Thank you very much for your patience today. We look forward

to hearing from you. And, Mr. Roney, we are going to start with

you and ask if you would proceed.

STATEMENTS OF JACK RONEY, DIRECTOR OF ECONOMICS

AND POLICY ANALYSIS, AMERICAN SUGAR ALLIANCE; RUSSELL ROBERTS, PROFESSOR OF ECONOMICS, J. FISH AND

LILLIAN F. SMITH DISTINGUISHED SCHOLAR AT THE

MERCATUS CENTER, DEPARTMENT OF ECONOMICS; JOHN

MURPHY, VICE PRESIDENT, WESTERN HEMISPHERE AFFAIRS, EXECUTIVE DIRECTOR, AMERICAN CHAMBERS OF

COMMERCE OF LATIN AMERICA, UNITED STATES CHAMBER

OF COMMERCE; AND DAVID F. WASKOW, DIRECTOR OF THE

INTERNATIONAL PROGRAM FRIENDS OF THE EARTH

Mr. RONEY. Thank you, Mr. Chairman. I am Jack Roney, Staff

Economist for the American Sugar Alliance. I have the privilege of

speaking today on behalf of 146,000 American farmers, workers,

and their families who grow, process, and refine sugar beets and

sugar cane in 19 States.

The proposed CAFTA threatens American sugar jobs in all 19 of

these States. By the government’s own estimates, sugar job losses

from the CAFTA would be far greater than any other sectors. The

same International Trade Commission study also questions the

overall value of the CAFTA to our economy. The ITC concluded

that the CAFTA will increase the U.S. trade deficit with that region, not reduce it.

Our sugar growers and processors are among the most efficient

in the world. Like other American farmers, we would welcome the

opportunity to compete globally on a level playing field free of government intervention. Like other American farmers, we can compete with foreign farmers. We cannot compete against foreign government subsidies.

The world’s sugar market is the world’s most distorted commodity market. A vast global array of subsidies encourages overproduction and dumping. We support correcting this distorted

dump market through genuine global sugar trade liberalization.

There is a right way and a wrong way to attack sugar subsidies.

The right way is the WTO, all countries all the table, all subsidies

on the table. The wrong way: bilateral and regional FTAs where

markets are wrenched open without addressing any foreign subsidies.

Virtually every FTA every completed around the world excludes

import access mandates for sugar. Only the United States has

every guaranteed access to its sugar market in an FTA, in the

NAFTA and the CAFTA. And these agreements are mired in controversy. Sugar must be reserved for the WTO where genuine trade

liberalization can occur.

As Congressmen from sugar-producing regions know, if the

CAFTA passes, it will have devastating effects on sugar jobs in

their states. Our farmers know their industry and their policy well.

We have examined the CAFTA provisions soberly and carefully. We

regard the CAFTA as a life or death issue. American sugar farmers

and workers who will lose their jobs are insulted by CAFTA proponents that trivialize the potential harm from this agreement

90

with cutesy, misleading depictions of additional access and

teaspoons or packets per consumer per day, or suggesting we

should thank the administration for the CAFTA.

We are already one of the world’s most open sugar markets. Past

trade agreement concessions force us to import upwards of one and

a half million tons of sugar per year from 41 countries duty-free.

This makes us the world’s fourth largest net importer of sugar. The

CAFTA countries and the DR are already our biggest duty-free

supplier, accounting for a fourth of all our imports.

Unfortunately, our market is already oversupplied. Every additional ton of sugar we are forced to import from foreign countries

is one ton less than struggling American sugar farmers will be able

to sell in their own market. Import more foreign sugar, export more

American jobs.

The CAFTA poses serious short-term and long-term dangers to

American sugar farmers and workers. In the short-term the

CAFTA sugar market access concessions, on top of import commitments the U.S. has made already in the WTO and the NAFTA will

prevent the USDA from administering a no-cost sugar policy, as

Congress directed it to in the 2002 Farm Bill. The CAFTA will further oversupply the U.S. sugar market.

The additional concessions will trigger off the marketing allotment program that permits USDA to restrict domestic sugar sales

and balance the market. U.S. sugar producers are currently holding more than a half million tons off the market and storing it at

their own expense. Absent marketing allotments, this surplus

sugar would cascade onto the market and destroy the price.

Contrary to the misleading claims of CAFTA proponents, there

is no cushion, no additional share of the U.S. market that Congress

intended to make available in FTAs. The difference between recent

actual imports and the one-and-a-half-million-ton marketing allotment trigger has already been allocated to Mexico under the

NAFTA. The administration is ignoring the NAFTA to promote the

CAFTA.

In the long-term CAFTA is the tip of the FTA iceberg. Behind

the CAFTA countries, 21 other sugar-exporting countries are lined

up like planes on the tarmac waiting to do their deal with the U.S.

No doubt they expect no less than the concessions already granted

to the CAFTA countries. Combined, these 21 countries export over

25 million tons of sugar per year, nearly triple U.S. sugar consumption. Obviously, the precedent the CAFTA concessions set would

make it impossible for the U.S. sugar industry to survive future

agreements.

In conclusion, Mr. Chairman, the CAFTA will cost thousands of

American sugar farmers and workers their jobs. The certain dangers of the CAFTA to the U.S. economy far outweigh the marginal

possible benefits. We respectfully urge the Congress reject the

CAFTA and focus U.S. trade liberalization efforts instead on the

WTO where there is genuine potential for progress. Thank you.

[The prepared statement of Jack Roney follows:]

PREPARED STATEMENT OF JACK RONEY, DIRECTOR OF ECONOMICS AND POLICY

ANALYSIS, AMERICAN SUGAR ALLIANCE

The American Sugar Alliance is grateful for the opportunity to provide testimony

for this important hearing. The ASA represents the 146,000 American farmers,

91

workers, and their families in 19 states, engaged directly and indirectly in the growing, processing and refining of sugarbeets and sugarcane. The U.S. sugar industry

generates nearly $10 billion in annual economic activity.

BACKGROUND ON U.S. AND WORLD SUGAR MARKETS

In some states, sugar is the most important cash crop, or among the most important. Sugar accounts for 44% of crop receipts in Louisiana, 37% in Wyoming, 24%

in Hawaii, and 10-20% in Idaho, Minnesota, Florida, North Dakota, Montana, and

Michigan.

American sugar growers and processors are among the most efficient in the world,

and, like other American farmers, we would welcome the opportunity to compete

globally on a level playing field, free of government intervention (Chart 1). Like

other American farmers, we can compete against foreign farmers, but we cannot

compete against foreign government subsidies and predatory trading practices.

The world sugar market is the world’s most distorted commodity market, because

of a vast, global array of subsidies. Subsidized growers overproduce and dump their

surpluses on the world market for whatever price it will bring. As a result of all

this dumping, the so-called world sugar price has averaged barely half the world

average cost of producing sugar for the past 20 years (Chart 2). The ASA supports

correcting this distorted dump market through genuine global sugar trade liberalization.

ONLY PATH TO SUGAR TRADE LIBERALIZATION: WTO

There is a right way and a wrong way to achieve global sugar trade liberalization.

• The right way: The World Trade Organization (WTO)—all countries at the table;

all programs and all subsidies on the table. The ASA has supported sugar trade

liberalization in the WTO since the initiation of the Uruguay Round of the

GATT in 1986.

• The wrong way: Bilateral and regional free trade agreements (FTAs), where markets are wrenched open without addressing any foreign subsidies. The Administration has rightfully declared it will not address any support programs or subsidies in FTAs. Yet it has effectively negotiated away the U.S. sugar support

program in the CAFTA.

Virtually every FTA ever completed around the world excludes import-access

mandates for sugar. Sugar import mandates are excluded from the U.S.-Canada portion of the NAFTA; from the Mercosur agreement among four South American sugar

producing countries, including Brazil; from the European Union’s (EU) trade agreements with South Africa, with Japan, and now with Mercosur; from Mexico’s FTAs

with other Latin American countries and with Japan; from Japan’s pending agreements with Thailand and with the Philippines. Sugar was excluded from the U.S.-

Australia FTA, which USTR touted as a ‘‘state of the art’’ agreement that gained

the U.S. immediate duty-free access for 99% of its exports to Australia, and which

Congress passed easily.

The only exceptions: Sugar market-access mandates were included in the U.S.-

Mexico portion of the NAFTA, and those provisions have been mired in controversy

ever since, and in the CAFTA, whose fate in the Congress is highly uncertain.

The ASA’s recommendation to the Administration has been long-standing and unambiguous: Reserve sugar negotiations for the WTO, where genuine trade liberalization can occur.

CAFTA DANGERS TO U.S. SUGAR, U.S. ECONOMY, WTO PROCESS

The U.S. sugar industry adamantly opposes the CAFTA and respectfully suggests

that this Committee do the same. The potential benefits for the U.S. economy simply do not outweigh the definite risks. The possible benefits are tiny: The entire

GDP of the six countries is about the same as New Haven, Connecticut’s. At serious

risk are American jobs in sugar and a host of other sectors.

• The government’s own analysis, by the International Trade Commission (ITC),

predicts that at the end of the 15-year implementation period, the U.S. trade

deficit with the CAFTA region will have increased, not fallen, to $2.4 billion.

(‘‘U.S.-Central America-Dominican Republic Free Trade Agreement: Potential

Economywide and Selected Sectoral Effects,’’ Investigation No. TA-2104-13, August 2004.) Other ITC findings from the same study:

• Job losses in the sugar sector will be 38 times greater than job loss in the next

most harmed sector, textiles. ITC also predicted American job losses in electronic equipment, transport equipment, oil, gas, coal and other minerals.

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• The U.S. already has 100% duty-free access for wheat exports to the CAFTA countries. • The U.S. already accounts for 94% of the small CAFTA market’s grain imports;

and 95% of soybean imports. • The U.S. gets immediate tariff-free access only for prime and choice cuts of beef.

With 40% of the CAFTA population earning less than $2 per day, the demand

for such expensive cuts of beef cannot be great. • FTAs such as the CAFTA distract from, and harm, the progress toward genuine

trade liberalization in the WTO.

For example, after the CAFTA countries have spent years negotiating special

access to the United States, the world’s biggest market, why should these countries cooperate in Geneva to provide the same access to the U.S. for the rest

of the world?

The FTA approach risks fragmenting the world economy into to a matrix of

trading blocs, each with its own tariff wall around it to protect the subsidies

within. Only in the WTO can we address both the tariff walls and the subsidies

within. • Opposition to the CAFTA is widespread.

The American public correctly perceives that CAFTA dangers outweigh the

risks. Polls indicate a majority of Americans opposes the CAFTA, including pluralities of Republicans, Democrats, and Hispanics.

Opposition extends to labor, environmental, textile, human rights, and faithbased organizations, both here and in the CAFTA countries.

Some national farm groups oppose CAFTA, some others are split. American

farmers have grown understandably skeptical that the promises of trade agreements and other efforts to expand U.S. exports far exceed actual performance.

In 1996, the U.S. achieved a record agricultural trade surplus of $27.3 billion.

In 2004, 11 years into the NAFTA, 10 years into the Uruguay Round Agreement

on Agriculture, and 9 years after the 1996 Freedom to Farm Bill reduced commodity prices to encourage more exports, our ag trade surplus has plummeted

to zero (Chart 3)—despite the weaker dollar that made our exports more competitive. Our ag imports have skyrocketed under these agreements; our exports

have been essentially flat.

The CAFTA promises more of the same, particularly in the near term. U.S.

import concessions are frontloaded—concentrated in the early years of the

agreement—and CAFTA-country import concessions are backloaded, to the final

stages of the 15-year implementation period.

As the Congressmen from sugar-producing states know, if the CAFTA passes, it

will have devastating effects on the U.S. sugar industry. Our farmers know their

industry and their policy well, and have examined the CAFTA provisions soberly

and carefully. We regard the CAFTA as a fully genuine, life-or-death issue. Our

farmers, whose livelihoods are at stake, are insulted when USTR trivializes the potential harm from this agreement with cutesy, misleading estimates such as the

amount of additional access in teaspoons per consumer or production per day.

We are already one the world’s most open sugar markets. Past trade-agreement

concessions have made us the world’s fourth largest net importer. We are required,

under WTO concessions, to import 1.256 million short tons of sugar per year from

41 countries, essentially duty free, whether we need the sugar or not. The six

CAFTA countries are already our largest duty free supplier, accounting for 27% of

our WTO-required imports. In addition, we are required under the NAFTA to import

up to 276,000 short tons per year of Mexican surplus sugar production, again,

whether we need the sugar or not.

Unfortunately, U.S. sugar consumption has declined in recent years, rather than

grown. As a result, every additional ton of sugar we are forced to import from foreign countries is one ton less that struggling American sugar farmers will be able

to produce or sell in their own market.

U.S. sugar policy is unique. It is the only U.S. commodity policy designed to operate at no cost to taxpayers. During this time of enormous federal budget pressures,

American sugar farmers are proud to have a program with no budgetary costs

(Chart 4).

Congress in the 2002 Farm Bill provided an inventory management approach for

sugar and a mandate for the Administration to operate the program at no cost by

avoiding sugar loan forfeitures. The Administration has two tools to balance the domestic market: the WTO-legal tariff-rate import quota and domestic marketing allotments. Basically, USDA forecasts U.S. sugar consumption, subtracts required

WTO and NAFTA imports, and sets the remainder as the American sugar producers’ share of their own market. With a large part of our market guaranteed to

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tive owners—must line up behind the foreign farmers for access to their own U.S.

market. If we produce more sugar than our marketing allotment, our producers

store the excess at their own expense, not the government’s expense, until that

sugar is needed.

Congress stipulated that if imports exceed 1.532 million short tons—the sum of

the WTO commitment of 1.256 million short tons and the NAFTA/Mexico commitment of up to 276,000 short tons—USDA would lose its authority to administer marketing allotments and sustain no-cost sugar-program operation. In effect, the Congress was saying: Though American sugar producers are among the world’s most efficient, we have already ceded to foreign producers over 1.5 million short tons of the

U.S. market. Let’s reserve the remainder of the U.S. market for American farmers,

rather than giving our market away, piecemeal, to foreign producers in FTAs

(Charts 5, 6).

American sugar producers are currently storing at their own expense about

600,000 tons of surplus sugar, and many are reducing acreage, idling or shutting

down mills—many of them farmer owned—to absorb the oversupply. Sugar prices

have been flat or depressed for some time—the raw cane sugar support price has

been the same 18 cents per pound for 20 years now, since 1985; prices in 2004 averaged 11% lower than in 2003 (Charts 7, 8). Unlike other program crops, sugar farmers receive no income support from the government to compensate for low market

prices. This allows scarce federal dollars to be directed toward assisting farmers of

export crops.

Sugar farmers, meanwhile, are making wrenching adjustments to survive, or just

going out of business. Fully a third of all U.S. beet and cane mills and refineries

have closed just since 1996, 30 plants in total (Chart 9).

As independent beet processors and cane refiners have gone out of business, beet

and cane farmers, desperate to retain outlets for their beets and raw cane sugar,

have organized cooperatively to purchase those operations. Beet farmers now own

94% of U.S. beet processing capacity and cane farmers own 57% of U.S. cane refining capacity (Chart 10).

This vertical integration has helped to increase efficiency, but growers have literally mortgaged the farm to stay afloat and are deeply in debt. Since sugar farmers

derive 100% of their return from the marketplace and none from government payments, they are more dependent on, and more vulnerable to, market forces than

other farmers. Sugar farmers are generally unable to switch to other crops because

of their commitment to supplying beets and cane to the processing mills they now

own. This makes sugar farmers all the more vulnerable to the type of market disruption the CAFTA would be likely to cause.

Sugar farmers based their investment decisions on the promise in the 2002 Farm

Bill of volume and price levels that would enable them to remain in business and

repay their loans. The CAFTA, and other FTAs, now threaten to break that promise.

LOW, STEADY U.S. CONSUMER PRICES FOR SUGAR

The low producer prices for sugar over the past several years have been a hardship for sugar farmers and caused considerable job loss as mills have closed. Unfortunately, consumers have seen no benefit from the low producer prices for sugar.

Though wholesale sugar prices in 2004 averaged 11% lower than the previous year

and 20% less than in 1996, consumer prices for sugar in the grocery store have risen

modestly; and, sweetened product prices have continued a steady rise, at least with

the overall rate of inflation (Chart 11).

Nonetheless, American consumers are getting a great deal on the sugar they purchase, with low, steady prices. U.S. retail sugar prices are essentially unchanged

since the early 1990’s. And new figures from LMC International show that the foreign developed-country retail sugar price averages 30% higher than the United

States’. EU average prices are 35% higher than the United States’, and retail sugar

prices in Australia and Canada, which claim to be exposed to world dump market

sugar, are virtually the same as prices here (Chart 13). (‘‘Retail and Wholesale

Prices of Sugar around the World,’’ LMC International Ltd, Oxford, England, April

2005.)

Taking into account developing countries, and varying income levels, LMC discovered that sugar here is about the most affordable in the world. In terms of minutes

of work to purchase one pound of sugar, only tiny Singapore is lower; the world average is four times higher than the U.S. And, our expenditure on sugar as a percent

of per capita income is the lowest in both the developed and the developing world

(Charts 13, 14).

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WORLD AVERAGE WHOLESALE PRICES ARE DOUBLE DUMP MARKET LEVELS

In the same survey, LMC also examined wholesale refined prices and found that

the global average is 22 cents per pound—double the world dump market average

price for 2004—and about the same as the United States’. This reinforces the meaninglessness of the world dump price. Globally, the vast majority of sugar is sold in

domestic markets at price levels that are, on average, double the world dump market price and similar to the United States’ (Chart 15).

It is worth noting that LMC found wholesale prices in Mexico to be 5 cents higher

than the United States’ 23 cents per pound, and Canada’s price to be just 2 cents

lower. This contradicts notions that U.S. candy manufacturers are moving to these

countries for lower sugar prices. Other factors are far more important in those decisions. For example, the same candy company that paid average wages in Chicago

of more than $14 per hour now pays an average of 56 cents per hour in Juarez,

Mexico (Chart 16).

CAFTA: SHORT AND LONG-TERM DANGERS TO U.S. SUGAR MARKET

Despite the fact that our market is already oversupplied, and despite the fact that

the six CAFTA countries already supply more than a fourth of our guaranteed dutyfree imports, the proposed CAFTA more than doubles the five Central American

countries’ duty-free access to the U.S. market, an increase of 111%. With an additional, smaller concession to the Dominican Republic, additional imports would total

120,000 short tons in the first year, growing to 169,000 short tons per year in year

15, and an additional 2,910 short tons per year forever after (Chart 17).

The CAFTA poses serious short-term and long-term dangers to the U.S. sugar industry.

In the short term, the CAFTA sugar market-access concessions—on top of import

commitments the U.S. has made already in the WTO, to 41 countries, and in the

NAFTA, to Mexico—will prevent the USDA from administering a no-cost U.S. sugar

policy, as Congress directed it to in the 2002 Farm Bill, and will badly further oversupply the U.S. sugar market.

The additional concessions will trigger off the marketing allotment program that

permits USDA to restrict domestic sugar sales and balance the market. Absent marketing allotments, surplus U.S. sugar—the 600,000 tons producers are currently

holding off the market and storing it at their own expense—would cascade onto the

market and destroy the price.

• Contrary to USTR’s misleading claims, there is no ‘‘cushion’’—no amount of additional import access Congress intended to make available in FTAs. The difference between recent actual imports and the 1.532-million-ton trigger has already been allocated to Mexico under the NAFTA. Mexico has not recently had

the surplus sugar available to send to the U.S. But surplus Mexican sugar may

soon become available again, with improved crops and with the successful conclusion of sweetener-trade discussions with Mexico that Members of Congress

from sugar and corn states strongly support.

We find it disturbing that USTR would ignore commitments made in past

agreements in order to promote new agreements.

In the longer term, the CAFTA is the tip of the FTA iceberg.

Behind the CAFTA countries, 21 other sugar-exporting countries are lined up,

like planes on a tarmac, waiting to do their deal with the U.S. and, no doubt,

expecting no less access than already granted to the CAFTA countries. Combined, these 21 countries export over 25 million tons of sugar per year, nearly

triple U.S. sugar consumption. Obviously, the precedent the CAFTA concession

would set will make it impossible for the U.S. sugar industry to survive future

agreements (Charts 18, 19).

The U.S. is pushing to complete the Panama, the Andean, and the Thailand

FTAs this year. The South Africa Customs Union FTA and the Free Trade Area

of the Americas are on hold, but still very much on the Administration’s FTA

agenda. All these involve major sugar producers and exporters.

CONCLUSION

In conclusion, Mister Chairman, the certain dangers of the CAFTA to the U.S.

economy outweigh the marginal, possible benefits. We respectfully urge that this

Committee reject the CAFTA, and focus U.S. trade liberalization efforts instead on

the WTO, where there is a genuine potential for progress.

The CAFTA would devastate the U.S. sugar industry. We are, therefore, expending all possible resources and energy to urge Congress to defeat this ill-conceived

agreement.

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Thank you.

Mr. ROGERS. Dr. Roberts.

STATEMENT OF RUSSELL ROBERTS

Mr. ROBERTS. I want to thank the committee for the opportunity

to appear today and discuss CAFTA. On the surface CAFTA would

seem to be an easy agreement, as a number of people have mentioned, due to the opening of foreign markets—sorry—on the surface, as a number of people mentioned today, it would be easy to,

you would think, to support CAFTA, given the fact that it opens

markets for our producers while leaving our markets that are already open relatively unchanged, yet trade agreements always

raise legitimate concerns about job losses in the United States.

And having recently traveled to Costa Rica at the invitation of

the State Department to speak on trade issues, I was struck by the

similarity of the concerns in Costa Rica. They too were worried

about job loss. But in fact trade changes the kind of jobs we do,

and in a flexible market, particularly one as dynamic as the United

States, the number of jobs is determined by how many people want

to work and the skills they have. Yes, some sectors will grow and

others will get smarter. Pointing to NAFTA, job losses without accounting for job gains is the wrong way to evaluate free trade

agreements. Similarly, trade deficits have little or no impact on the

total number of jobs in the United States, despite concerns to the

contrary.

I spoke to a wide array of people in Costa Rica, students, journalists, labor representatives, and government cabinet ministers, and

being a small country that has undergone a great deal of economic

change in the last 25 years, they were very aware of the benefits

of being a part of the global trading system. They also understood

the uncertainty and unpredictability of the future. But most Costa

Ricans I spoke to embraced economic change and trade as the inevitable key to growth for their small country and a transformation

of their economy.

But they would always ask the same question: if trade is good,

why doesn’t CAFTA allow Costa Rica to export sugar freely to the

United States? If Costa Rica is willing to compete with U.S. engineers and other farmers, why isn’t America willing to compete and

cope with the challenge of Costa Rican sugar farmers? Despite the

words ‘‘free trade’’ in the title of the agreement, CAFTA would

allow only the tiniest of expansions in sugar imports phased in over

15 years.

And they would ask me why do Americans fear Costa Rican

sugar? They don’t, I would explain, not most Americans anyway. In

fact keeping out foreign sugar punishes me and every other consumer in the U.S. because the U.S. price is roughly double the rest

of the world. We American consumers are punished, not you Costa

Ricans, by the decision to keep virtually all sugar from Costa Rica

out that would come in in a free market.

Jobs created in the sugar industry here in the United States are

offset by job losses in the American candy and food industry and

elsewhere. So we negotiate a trade agreement with some of the

poorest countries in the region, but we make sure that one of the

things they do best, which is grow sugar, is essentially off the

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table. There is no attractive way to defend that policy when you

are standing in the fields of a poor county.

So CAFTA is not perfect. In a perfect world sugar would be freely

traded. But CAFTA is a step in the right direction. It lowers trade

barriers on an enormous range of products that are traded in the

region. The best should not be the enemy, the good. The CAFTA

will encourage the signatories to the agreement to do what they do

best. The result will be a higher standard of living.

And ironically, sugar has become the flashpoint for this discussion even though the sugar industry gets preferential treatment

under CAFTA, even though they have quotas in place and tariffs

that isolate them from world competition, even though the sugar

industry has made sure that CAFTA leaves their domestic monopoly virtually intact, somehow the entire debate over CAFTA is

about sugar jobs. That is quite an achievement for an industry

with less than 60,000 employees.

The job losses in sugar to CAFTA will be dwarfed by retirement,

turnover, job loss due to technology. Should the threat of these job

losses hold this agreement hostage and prevent poor nations from

buying our goods? Should the threat of these job losses prevent the

expansion of U.S. employment in sectors that will grow?

Our natural concern for these workers should not confuse us

about the cost of stopping economic change that CAFTA will bring.

Economic change like free trade creates our standard of living.

Without economic change, without trade, our economy would be

stagnant.

Now, economic change is always challenging. I was explaining to

my children the other day, they are here; they are off from school,

by the way. Their school is not in session. I am not violating any

truancy laws. But I explained to them when American baseball

players were considering letting in African American players, you

can imagine that American players born here in the United States

who were white would be afraid of that competition. And my 7-

year-old, who is sitting right there in the brown shorts, said, but

that wouldn’t be fair. He said it wouldn’t be nice to keep out African American players. And said besides, it would be good for the

team. Shouldn’t the players be in favor of that?

And that got me thinking about the Dominican Republic. At the

start of this year’s baseball season, 385 players born in the Dominican Republic had played in the major leagues, including Pedro

Martinez, Miguel Tejada, Vladimir Guerrero, Manny Ramirez.

Surely the game of baseball, surely our lives, surely their lives are

better for letting them play here. Who would argue we should keep

them out in order to create more opportunity for native-born Americans in baseball? And as my 7-year-old understands, it wouldn’t be

nice. It would be bad for baseball and its fans.

It is good that we have let players from all over the world come

to America to use their skills to the greatest advantage, and it

would be good to let other things, besides baseball players, come

to the United States from the Dominican Republic and our fellow

nations in Central America. In return, we will send our products

using our skills to help them. CAFTA will be good for the United

States, good for the Dominican Republic, and good for Central

America. It will raise the standard of living in each nation, but perVerDate 11-MAY-2000 11:43 Aug 30, 2005 Jkt 000000 PO 00000 Frm 00100 Fmt 6633 Sfmt 6602 21632.TXT HCOM1 PsN: HCOM1
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haps more importantly, it will make sure that the peoples of each

nation have the greatest opportunity to use their skills in the most

effective and productive ways. Thank you very much.

[The prepared statement of Russell Roberts follows:]

PREPARED STATEMENT OF RUSSELL ROBERTS, PROFESSOR OF ECONOMICS, SMITH

DISTINGUISHED SCHOLAR, MERCATUS CENTER, GEORGE MASON UNIVERSITY

Mr. Chairman. Congressman Schakowsky. Members of the committee. Thank you

for the opportunity to appear before you and discuss CAFTA, the Central American

Free Trade Agreement, which now includes the Dominican Republic as well.

On the surface, CAFTA would seem to be an easy agreement for the United

States to support. Many products and services already arrive duty-free in the

United States from Central America. But under CAFTA, many products and services currently protected in Central America would now have to compete with American exports, opening markets to numerous American products.

Yet CAFTA remains highly controversial with concerns that the agreement will

cost the United States jobs trying to compete with low-wage workers in Central

America working in a less demanding regulatory environment.

Having recently traveled to Costa Rica at the invitation of the State Department

to speak on trade issues, I was struck by the similarity of the concerns raised in

Costa Rica. Surely, little Costa Rica would have no chance of standing up to the

United States economy. Jobs would be lost to the powerful American workers.

Both arguments cannot be right. It cannot be that employment in both economies

will shrink as the other expands. One of these worries is wrong. Or both are. But

both cannot be right.

Both are wrong. When NAFTA passed, we were told of the millions of jobs that

would inevitably flow to Mexico because of Mexico’s lower wages and less rigorous

labor and environmental standards. Yet those fears were unrealized. They were no

more plausible than the notion that all of America’s jobs would end up in Mississippi because of Mississippi’s low wages.

Trade changes the kind of jobs we do, but in a flexible labor market, particularly

one as dynamic as the United States, the number of jobs is determined by how

many people want to work and the skills they have. The main effect of trade is to

allow both trading parties to use their skills wisely and effectively.

Costa Rica currently has a state monopoly on telecommunications. There are a lot

of engineers employed by that state monopoly. What will happen to them when that

monopoly is opened to competition by CAFTA? Some will keep their jobs working

in areas like land-line phones that the government will probably still be able to provide competitively. Some will find work with American firms now free to operate

profitably in Costa Rica. Some will lose their jobs and find work as engineers outside of the telecommunications industry. And some will lose their jobs and find work

outside of engineering.

The average Costa Rican who is not an engineer employed by the state-run

telecom company will be better off. The average Costa Rican will enjoy lower prices

and more choices. That will mean more resources left over to do new things with,

new products and services to enjoy that were not affordable before. That in turn will

mean more employment in Costa Rica as those products and services expand, offsetting any job losses in the engineering sector.

The bottom line for Costa Rica is better phone service and internet access at lower

prices and more opportunities created elsewhere in the economy. Understandably,

Costa Rican engineers are nervous about the uncertainty and challenges of the future. But the net effect on Costa Rica would be positive.

The same logic applies to the Costa Rican car industry. Wisely, Costa Rica doesn’t

have a car industry—it would be too expensive. It would create inefficient and unproductive jobs in the car sector relative to other sectors. By importing cars, Costa

Rica gives up those jobs and creates jobs elsewhere. By importing cars, Costa Rica

uses the skills of its people more wisely and the result is less expensive cars for

Costa Ricans to enjoy.

I spoke to a wide array of people in Costa Rica—students, journalists, labor representatives and government cabinet ministers. Being a small country that has undergone a great deal of economic change in the last 25 years, they were very aware

of the benefits of being part of the global trading system. They also understood the

uncertainty and unpredictability of the future. But most Costa Ricans I spoke to embraced that change as an inevitable part of growth and the transformation of their

economy.

98

But they would always ask the same question. If trade is good, why doesn’t

CAFTA allow Costa Rica to export sugar freely to the United States? Costa Rica

is willing to cope with the challenge of competing with American telecom engineers

and American telecom companies? Why isn’t America willing to cope with the challenge of Costa Rican sugar farmers?

They were referring to the fact that while American farmers and telecom companies and medical device companies would have relatively open access to sell their

products in Costa Rica, sugar farmers in Costa Rica would have very little freedom

to sell their sugar in America. Despite the words ‘‘free trade’’ in the title of the

agreement, CAFTA would allow only the tiniest of expansions in sugar imports

phased in over 15 years. CAFTA limits the expansion of sugar imports into the

United States to less than 2% of US consumption over the next 15 years.

Why do Americans fear Costa Rican sugar?

They don’t, I would explain to my hosts in Costa Rica. Not most Americans, anyway. In fact, keeping out foreign sugar punishes me and every other consumer in

the United States. The US price of sugar is roughly double that of the rest of the

world. We are punished, not you, I explained, by the decision to keep out virtually

all sugar from Costa Rica that might come in under a truly open market. Jobs created in the sugar industry are offset by job losses in the American candy and food

industries and elsewhere.

So we negotiate a trade agreement with some of the poorest countries in the region but we make sure that one of the things that they do best, grow sugar, is essentially off the table. There is no attractive way to defend that policy when you’re

standing in the fields of a poor country.

It makes no more sense for America to insist on always growing its own sugar

than it does for Costa Rica to use protectionism to create a Costa Rican car industry. But that is what we have decided with CAFTA.

So CAFTA is not perfect. In a perfect world, sugar would be freely traded along

with telecom services and cars and tourism and ornamental plants and corn and

chicken. But CAFTA is a step in the right direction. It lowers trade barriers on an

enormous range of products that are traded in the region. The best should not be

the enemy of the good. CAFTA will encourage the signatories to the agreement to

do what they do best and the result will be a higher standard of living for all of

the partners to the agreement.

Ironically, despite the special treatment of the American sugar industry in

CAFTA, the American sugar industry has become the flashpoint for the debate over

the agreement in this country. Even though the sugar industry gets preferential

treatment, even though the sugar industry has quotas and tariffs in place that isolate them from world competition, even though the sugar industry has made sure

that CAFTA leaves their domestic monopoly virtually intact, somehow, the entire

debate over CAFTA is about fear of losing jobs in the sugar industry.

That’s quite an achievement for an industry with less than 60,000 employees.

(The sugar industry claims there are 372,000, but that number is inflated by counting corn sweetener jobs and then multiplying the total by two and a half.) About

8 million jobs are destroyed and created every quarter in the US economy. When

the economy is going well, more jobs are created than destroyed. When we are in

a recession, more jobs are destroyed than created. But the norm is good times—a

growing economy where there is net job growth, where more jobs are created than

destroyed. But even in good times, millions of jobs disappear for thousands of reasons—companies go out of business, consumers decide they want fewer of one thing

and more of another. These jobs are replaced by new jobs in new companies or companies that are expanding.

Millions of jobs appearing and disappearing. That is a sign of great economic

health, that churning of jobs in response to new desires, new information, new technology and new opportunity. All of those jobs destroyed and created in response to

economic change. It is a strange thing to exert all this political energy to stop economic change in one tiny sector, the sugar industry, but because it is identifiable,

the sugar jobs and the sugar profits get special treatment.

Our natural concerns for workers in the sugar sector and other sectors that will

be affected by CAFTA should not confuse us about the costs of stopping the economic changes that CAFTA will bring. Economic changes like free trade create our

standard of living and the incredible opportunities that each generation has to

shape the world according to its dreams and skills. Without economic change, without trade, without innovation, our economy would be stagnant. A dynamic economy

and a growing standard of living are the greatest gifts we can give each generation.

Even with such benefits, economic change is always challenging, no matter its

source and no matter how small or how fair such change is. I was explaining to my

children how understandable it is for people to fear change and competition. For exVerDate 11-MAY-2000 11:43 Aug 30, 2005 Jkt 000000 PO 00000 Frm 00102 Fmt 6633 Sfmt 6621 21632.TXT HCOM1 PsN: HCOM1
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ample, I explained, imagine being a white baseball player when there was discrimination in baseball and African-American players were not allowed to play in the

major leagues. You would be worried about losing your job to a better player. My

seven-year old did not find this understandable. What about Willie Mays, he wondered. And he told me that the white players should have been in favor of letting

African-Americans play because it would be good for the team. Besides, he said,

keeping out some players because of the color of their skin isn’t nice.

That got me thinking about the Dominican Republic. At the start of this year’s

baseball season, 385 players born in the Dominican Republic had played in the

major leagues including Pedro Martinez, Sammy Sosa, Albert Pujols, Miguel Tejada,

Vladimir Guerrero and Manny Ramirez. Surely, the game of baseball is better for

allowing them to play here. Surely our lives as fans have been enriched by their

excellence. And surely their lives have been enhanced by the opportunity to play

here.

Who would argue that we should keep them out in order to create more opportunity in baseball for native-born Americans? As my seven year old understands,

that would not be nice. And it would be bad for baseball and its fans.

It is good that we have let players from all over the world come to America to

use their skills to their greatest advantage. Both America and those players benefit.

And it will be good to let other things besides baseball players come to the United

States from the Dominican Republic and her fellow nations in Central America. In

return, we will send our products using our skills to help them in return. CAFTA

will be good for the United States, good for the Dominican Republic and good for

Central America. It will raise the standard of living of each nation, but perhaps

more importantly, it will make sure that the peoples of each nation have the greatest opportunity to use their skills in the most effective and productive ways.

Mr. STEARNS. Thank you. Mr. Murphy.

Mr. MURPHY. Mr. Chairman——

Mr. STEARNS. I think you need to put your mike on. Yes.

STATEMENT OF JOHN MURPHY

Mr. MURPHY. Mr. Chairman, Congresswoman Schakowsky, I

would like to thank the committee for the chance to testify here

today.

Speaking on behalf of the U.S. Chamber of Commerce, which is

the nation’s largest business federation representing more than

three million businesses of every size, sector, and region, the U.S.

Chamber and its members strongly support DR-CAFTA.

While these six countries look small on a map and they are significantly poorer than the United States, they are excellent customers for U.S. products. In 2004 the six countries purchased over

$15 billion in U.S. exports. That is more than India, Indonesia, and

Russia combined. It is also more exports than Italy purchased from

the United States; Italy, a G-7 country that is one of the largest

and most sophisticated economies in the world.

A number of members of the committee and witnesses have already commented on how DR-CAFTA will give American companies a level playing field. The fundamental point is that the U.S.

market is already open, but our trading partners, tariffs, and

quotas continue to stand as a significant barrier to U.S. exports.

This point is critical and has been well made.

I would like to focus my comments on the profound value of the

agreement as a vehicle for generating new business opportunities

for American companies by energizing economic reform in Central

America and the Dominican Republic, questions that go beyond

simply cutting tariffs.

One of the Central American trade ministers once commented

that ‘‘DR-CAFTA contains 15 years worth of economic reform in a

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led with such ambition or speed under other circumstances. Consider the following: first, DR-CAFTA will guarantee transparency

in government procurement. The agreement mandates competitive

bidding for contracts and that extensive information about these

opportunities be made available on the Internet and not just to

well-connected insiders. In this sense, DR-CAFTA is an extremely

useful weapon against corruption.

Second, DR-CAFTA will ensure a level playing field for services,

the most rapidly growing portion of U.S. companies’ engagement in

international trade, and one where the United States enjoys a large

surplus. To give a specific example, DR-CAFTA will open the telecommunications and insurance markets of Costa Rica where U.S.

companies are currently shut out. Many other sectors, from express

delivery to financial services, will see new and transparent rules

that will allow U.S. companies to compete and prosper in the region, generating jobs and income there and back home in the

United States.

Third, DR-CAFTA will shore up legal protections for copyrights,

patents, and trademarks so that creative artists who produce movies and television shows, researchers who create new medicines,

and companies that create software will be protected. Counterfeiters will be put on notice that these countries will protect intellectual property, which is the future of the U.S. economy with the

full force of the law. And new resources will be directed to enforcement.

Members of the committee, these free trade agreements work.

Consider the U.S.-Chile Free Trade Agreement, which DR-CAFTA

resembles in many respects. The Department of Commerce reports

that U.S. exports to Chile rose by an astonishing 33 percent last

year, which was the first year of that free trade agreement’s implementation. We have seen similar advances already as this Caribbean Basin Initiative and its successors over the past 20 years

have doubled and tripled trade with these countries.

How often does the Congress have a chance to secure such a remarkable win-win for our workers, farmers, and companies, and for

our friends and neighbors? If U.S. companies, workers, and consumers are to thrive in an increasingly competitive world, new

trade agreements such as DR-CAFTA will be critical.

In the end, American business is quite capable of competing and

winning against anyone in the world when markets are open and

the playing field is level. All we are asking for is a chance to get

in the game. I appreciate the leadership of this committee and the

chance to testify today. Thank you.

[The prepared statement of John Murphy follows:]

PREPARED STATEMENT OF JOHN MURPHY, VICE PRESIDENT, WESTERN HEMISPHERE

AFFAIRS, EXECUTIVE DIRECTOR AMERICAN CHAMBERS OF COMMERCE IN LATIN

AMERICA, UNITED STATES CHAMBER OF COMMERCE

The Chamber of Commerce of the United States of America (U.S. Chamber) and

the Association of American Chambers of Commerce in Latin America (AACCLA)

are pleased to present the House Committee on Energy and Commerce Subcommittee on Commerce, Trade, and Consumer Protection with this testimony regarding the U.S.-Dominican Republic-Central America Free Trade Agreement (DRCAFTA). Our organizations strongly support Congressional approval of this landmark trade agreement, and we urge the House to do so as soon as possible.

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The U.S. Chamber is the world’s largest business federation, representing more

than three million businesses of every size, sector and region. AACCLA represents

23 American Chambers of Commerce in 21 Latin American and Caribbean nations,

and its 20,000 member companies manage over 80% of all U.S. investment in the

region.

International trade plays a vital part in the expansion of economic opportunities

for our members. As such, the U.S. Chamber and AACCLA have helped lead the

business community’s effort to make the case for new free trade agreements. We do

so because U.S. businesses have the expertise and resources to compete globally—

if they are allowed to do so on equal terms with our competitors.

From this perspective, DR-CAFTA is an outstanding trade agreement. It will

slash trade barriers for U.S. exports, enhance protections for U.S. investment overseas, and strengthen the competitiveness of American companies—both big and

small—throughout the world. We believe the agreement is worthy of your support.

OPENING TRADE, GENERATING GROWTH

America’s international trade in goods and services accounts for nearly a fifth of

our country’s GDP. As such, it is difficult to exaggerate the importance of the leadership demonstrated by Congress in renewing Presidential Trade Promotion Authority (TPA) two and a half years ago. As we predicted, this action by Congress has

helped reinvigorate the international trade agenda and has given a much-needed

shot in the arm to American businesses, workers, and consumers.

When TPA lapsed in 1994, the United States was compelled to sit on the sidelines

while other countries negotiated numerous preferential trade agreements that put

American companies at a competitive disadvantage. As we pointed out to Congress

during our aggressive advocacy campaign for approval of TPA, the United States

was party to just three of the roughly 150 free trade agreements in force between

nations at that time.

The passage of TPA allowed the United States to complete negotiations for bilateral free trade agreements with Chile, Singapore, Australia, and Morocco, all of

which won bipartisan approval in Congress. These agreements are already bearing

fruit; for example, the Department of Commerce reports that U.S. exports to Chile

rose by an astonishing 33% in 2004, the first year of implementation of the U.S.-

Chile Free Trade Agreement. Free trade agreements with roughly 20 additional

countries are now in various stages of completion.

Why is DR-CAFTA so critical? First, the agreement is good for workers, consumers, and businesses in the United States. And second, the agreement is good for

workers, consumers, and businesses in Central America and the Dominican Republic.

BIG MARKETS, BIG OPPORTUNITIES

The commercial benefits of DR-CAFTA for the United States are expected to be

highly significant. While these six democracies look small on a map, they are excellent customers for American business. Purchasing $15.7 billion in U.S. exports in

2004, Central America and the Dominican Republic buy more U.S. goods than Australia, Italy, or Sweden.

These existing trade flows make DR-CAFTA the largest free trade agreement in

more than a decade. In fact, the 45 million citizens of Central America and the Dominican Republic purchase more U.S. goods than the 1.5 billion citizens of India,

Indonesia, and Russia—combined.

What is the United States selling to these countries? About one-third of all U.S.

exports to Central America and the Dominican Republic are made by the U.S. textile and apparel industries. Computers, electronics, and information technology

products represent almost another third. And farm products, ranging from soup to

nuts, account for a large share of American sales to the six countries.

This success story began 20 years ago, when a tremendous bipartisan coalition

created the Caribbean Basin Initiative. By a vote of 392 to 18, the House of Representatives decided in July 1983 to do away with most tariffs on imports from Central America and the Caribbean in an effort to help the region with ‘‘trade, not aid.’’

The Senate followed suit with a similarly significant favorable vote.

The Caribbean Basin Initiative eliminated tariffs on nearly all imports from Central American and the Caribbean. In 2003, 77% of Central American and Dominican

industrial products (including 99% of non-apparel industrial products) and 99.5% of

agricultural products entered the United States duty-free.

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MAKING TRADE A TWO-WAY STREET

More than any previous free trade agreement, DR-CAFTA is about reciprocity. It

will level the playing field for the thousands of U.S. workers and businesses that

rely on exports to Central America and the Dominican Republic. It will provide immediate, duty-free access to the six-country market for more than 80% of U.S. consumer and industrial goods and more than half of all U.S. agricultural exports to

the six countries, with further openings phased in.

To gauge the commercial value of the agreement, the U.S. Chamber of Commerce

has released a series of state-by state economic impact studies that found substantial economic gains for American workers and the economy from DR-CAFTA. We

used a widely respected input-output economic model known as RIMS II that has

been used for years by economists at the U.S. Department of Commerce and elsewhere, and we proceeded with some very conservative assumptions about the

growth of exports. For instance, we assumed that U.S. exports to the six countries

would grow at only half the rate of growth of exports to Chile in 2004, the first year

of implementation of the free trade agreement with that country.

The results are extremely promising. In the first year of DR-CAFTA’s implementation, the agreement would generate $3.9 billion in new sales across all industries

and $866 million in new earnings for workers in the 12 states profiled. In would

also create over 26,000 new jobs in its first year. This table summarizes our findings:

Summary of Findings of State-by-State Economic Impact Studies

The full studies are available at: www.uschamber.com/goto/drcafta

AFTER ONE YEAR Increased sales

in all industries

Increased earnings of

employees

in all industries

New jobs created

in all industries

Alabama ...................................................................................... 190,000,000 40,000,000 1,490

California .................................................................................... 221,000,000 51,000,000 1,287

Florida ......................................................................................... 985,000,000 232,000,000 7,008

Georgia ........................................................................................ 262,000,000 52,000,000 1,516

Illinois ......................................................................................... 79,000,000 24,000,000 693

Louisiana * .................................................................................. 339,000,000 77,000,000 2,769

New Jersey ................................................................................... 71,000,000 14,000,000 342

New York ..................................................................................... 149,000,000 32,000,000 794

North Carolina ............................................................................. 736,000,000 163,000,000 5,404

Pennsylvania ............................................................................... 94,000,000 20,000,000 608

South Carolina ............................................................................ 167,000,000 27,000,000 912

Texas ........................................................................................... 683,000,000 134,000,000 3,326

TOTAL .......................................................................................... $3,976,000,000 $866,000,000 26,149

* ‘‘CAFTA: Potential for Louisiana’s Prosperity,’’ by Dr. James A. Richardson, Alumni Professor of Economics, Louisiana State University,

March 2004. This study used the U.S. Department of Commerce’s Bureau of Economic Analysis Regional Input-Output Modeling System (RIMS

II) in the same fashion as the U.S. Chamber studies. However, the figures cited in this table are based on a projected increase in exports

from Louisiana to the other DR-CAFTA countries of 16%. The U.S. Chamber studies use a figure of 17% for the first year. For comparison,

U.S. exports to Chile rose by 33% in 2004, the first year of implementation of the U.S.-Chile Free Trade Agreement.

Nine years after implementation, DR-CAFTA would boost sales by over $20 billion

in the 11 states for which data are available. In the same period, the agreement

would raise workers’ earnings by $4.5 billion and create more than 130,000 new jobs

in the 11 states.

AFTER NINE YEARS Increased sales

in all industries

Increased earnings of

employees

in all industries

New jobs created

in all industries

Alabama .................................................................................... 1,021,000,000 214,000,000 7,901

California .................................................................................. 2,486,000,000 573,000,000 13,132

Florida ....................................................................................... 5,200,000,000 1,200,000,000 36,982

Georgia ...................................................................................... 1,405,000,000 283,000,000 8,691

Illinois ....................................................................................... 445,000,000 97,000,000 2,402

New Jersey ................................................................................. 381,000,000 79,000,000 1,801

New York ................................................................................... 802,000,000 173,000,000 4,215

North Carolina ........................................................................... 3,900,000,000 876,000,000 28,913

Pennsylvania ............................................................................. 504,000,000 107,000,000 3,062

South Carolina .......................................................................... 701,000,000 144,000,000 6,273

Texas ......................................................................................... 3,600,000,000 718,000,000 17,127

TOTAL ........................................................................................ $20,445,000,000 $4,464,000,000 130,499

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As noted above, the vast majority of Central American and Dominican exports already enter the U.S. marketplace duty-free, so the risk of job losses due to enhanced

competition from imports is extremely limited. In sectors where imports from Central America and the Dominican Republic are not entering the United States dutyfree, the U.S. average tariff is significantly lower than that faced by our exports to

these countries. While U.S. rates average 3.6%, Guatemala’s average applied industrial tariff is 7.1%, Honduras’s is 6.7%, El Salvador’s is 6.5%, Nicaragua’s is 4.9%,

Costa Rica’s is 4.6% and the Dominican Republic’s is 10.7% (2001 figures).

SUPPORT FROM FARMS TO FACTORIES

The Chamber is far from alone in recognizing the potential of DR-CAFTA; studies

prepared by other organizations have also projected impressive gains. A study by

the American Farm Bureau Federation, which is the nation’s largest association of

farmers and ranchers, projected that the agreement will boost U.S. agricultural exports by $1.5 billion, which explains why over 50 leading agricultural commodity

groups have endorsed the agreement.

In the textile and apparel sectors, the agreement will promote even stronger partnerships between companies in the United States, Central America, and the Dominican Republic. This will enable this hemisphere to compete more effectively in the

face of rising international competition in these sectors since the demise of the global system of quotas on textiles on January 1, 2005. Most experts predict that Asian

textile and apparel manufacturers will be the principal beneficiaries of the end of

quotas—at the expense of apparel producers in Central America and the Dominican

Republic, and their textile suppliers in the United States.

For years, the U.S. textile industry has benefited from an integrated supply chain

and market with the DR-CAFTA nations, which constitute a key sourcing location

for U.S. apparel and retail companies. Unlike other garment production centers,

Central America and the Dominican Republic have emerged as the dominant consumers of U.S. textile products. Since the passage of the U.S.-Caribbean Basin

Trade Partnership Act in 2000, the region has become one of the largest and fastest

growing export markets for U.S. cotton growers, yarn spinners, and fabric mills.

As a result, garments imported from Central America and the Dominican Republic have U.S. content exceeding 50% while garments imported from Asia typically

have less than 1% U.S. content. Without DR-CAFTA, apparel operations in Central

America and the Dominican Republic will not be able to compete with Asian manufacturers, who have been ramping up sales since the global quota regime on textiles

ended in January. If apparel manufacturers in Central America and the Dominican

Republic cannot compete with Asia, a domino effect will hit cotton growers, yarn

spinners, and fabric mills in the United States as their best customers go under.

On a more general level, the evidence is overwhelming that trade is a powerful

tool to strengthen the U.S. economy. As former U.S. Trade Representative Robert

Zoellick has pointed out, the combined effects of the North American Free Trade

Agreement (NAFTA) and the Uruguay Round trade agreement that created the

World Trade Organization (WTO) have increased U.S. national income by $40 billion to $60 billion a year. This helped lead to the creation of millions of new American jobs in the past 15 years. Many of these jobs were created in the export sector

where, on average, jobs pay 13 to 18% more.

In addition to the increased wages, the lower prices generated by NAFTA and the

Uruguay Round on imported items mean that the average American family of four

has gained between $1,000 to $1,300 in spending power—an impressive tax cut, indeed.

BENEFITS FOR CENTRAL AMERICA AND THE DOMINICAN REPUBLIC

The U.S. Chamber and AACCLA are speaking in favor of DR-CAFTA to advance

the interests of U.S. businesses, workers, and consumers. However, it’s clear that

the agreement will also be beneficial for workers, consumers, and businesses in Central America and the Dominican Republic—some of our closest neighbors.

Consider what Central America and the Dominican Republic were like 20 years

ago. Several of these countries were at war, internally, and with violence spilling

across their borders. Contrast that with the peaceful and democratic elections we

have seen just in the past 18 months in El Salvador, Guatemala, and the Dominican

Republic. It’s worth recognizing that the outgoing administrations all supported DRCAFTA strongly—and so do the new ones. These countries made some tough

choices, and they’ve been rewarded with economic growth and progress in the fight

against poverty.

Consider the example of El Salvador, which in the 1990s brought inflation under

control, fought corruption, and moved toward a more free market economy. As a reVerDate 11-MAY-2000 11:43 Aug 30, 2005 Jkt 000000 PO 00000 Frm 00107 Fmt 6633 Sfmt 6621 21632.TXT HCOM1 PsN: HCOM1
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sult, per capita incomes in El Salvador grew 10 times faster in the 1990s than in

the 1980s.

Again, if things are going so well, what do we need DR-CAFTA for? The agreement is strong medicine, and it represents an opportunity to make sure the progress

of the past two decades doesn’t slip away. The agreement will enhance democratic

institutions, business transparency, and economic reform—all while locking in a

strong partnership with the United States. Consider the following:

1) DR-CAFTA will guarantee transparency in government procurement, with competitive bidding for contracts and extensive information made available on the

Internet—not just to well-connected insiders;

2) DR-CAFTA will ensure a level playing field in the regulatory environment for

services, including telecoms, insurance, and express shipments; and

3) DR-CAFTA will shore up legal protections for copyrights, patents and trademarks, so that creative artists who produce movies and television shows, researchers who create new medicines, and companies that create software will

be protected. Pirates and counterfeiters will be put on notice that these countries will protect intellectual property with the full force of the law.

FIGHTING POVERTY, HELPING WORKERS

Finally, DR-CAFTA will help in the fight against poverty. Despite significant

progress in the past 20 years, many Central Americans continue to live on just a

few dollars a day. By enhancing opportunities for economic growth, the agreement

will help provide jobs at all levels of the Central American and Dominican economies, while providing governments with additional resources for much-needed education, health care, and basic infrastructure projects.

Some critics charge that the agreement doesn’t do enough to protect workers’

rights, even though it does more in this regard than any trade agreement in history.

The agreement builds on the fact that five of these countries have ratified all eight

of the core conventions of the International Labor Organization; the sixth country,

El Salvador, has ratified six of the conventions and is already upholding the final

two based on provisions in its own constitution.

The Washington Post summarized the situation in an editorial: ‘‘It is a bad idea

to oppose trade deals on the grounds that labor protections are advancing, but not

quite fast enough—This neglects the truth that the best way to boost workers’ bargaining capacity is to boost job creation, so that labor is in strong demand. Trade

deals that create jobs are good for workers’ rights as well as workers’ incomes.’’ We

agree.

WHAT THE CHAMBER IS DOING

The U.S. Chamber and AACCLA are conducting an ambitious educational strategy to build support for Congressional approval of DR-CAFTA. In concert with our

partners in the Business Coalition for U.S.-Central America Trade, the Chamber

and AACCLA have organized hundreds of face-to-face meetings with members of

Congress to make the case for the agreement. We have also met with members of

Congress in their districts throughout the country as part of our ongoing

‘‘TradeRoots’’ program to educate business people and workers about the benefits of

open trade. We have found broad support for the agreements, both in the Congress

and in the business community.

As part of this ‘‘TradeRoots’’ effort, the U.S. Chamber and AACCLA have published a ‘‘Faces of Trade’’ book to highlight small businesses in the United States

that are already benefiting from trade with Central America and the Dominican Republic—and that stand to benefit even more from free trade with these two markets.

We invite you to review these success stories and see the face of American trade

today (electronic copies of the book are available at www.traderoots.org). It isn’t just

about multinational corporations, which can usually find a way to access foreign

markets, even where tariffs are high. DR-CAFTA will first assist the hundreds of

thousands of small companies that are accessing international markets—and that

are meeting their payroll, generating jobs, and growing the American economy.

The U.S. Chamber and AACCLA are also making the case for the agreement in

a nationwide tour with the Central American and Dominican ambassadors to meet

with local business people, farmers, and journalists in their home towns. We’ve organized major events in more than a dozen cities with the ambassadors, and people

from all walks of life are excited to learn about how DR-CAFTA will create new opportunities for business and employment.

This is just the tip of the iceberg. We’ve generated a wealth of information about

the potential benefits of these agreements and our efforts to make them a reality.

In the interest of brevity, I would simply urge you to contact the Chamber if you

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need more information. Our websites are a good place to start: www.uschamber.com

and www.aaccla.org. Another great source of information is the website of the Business Coalition for U.S.-Central America Trade at www.uscafta.org.

CONCLUSION

Trade expansion is an essential ingredient in any recipe for economic success in

the 21st century. If U.S. companies, workers, and consumers are to thrive amidst

rising competition, new trade agreements such as DR-CAFTA will be critical. In the

end, U.S. business is quite capable of competing and winning against anyone in the

world when markets are open and the playing field is level. All we are asking for

is the chance to get in the game.

The U.S. Chamber and AACCLA appreciate this committee’s leadership on these

critical issues, and we ask you to move expeditiously to bring DR-CAFTA to a vote.

Thank you.

Mr. STEARNS. Thank you. Mr. Waskow.

STATEMENT OF DAVID F. WASKOW

Mr. WASKOW. Good afternoon. I am David Waskow, Director of

the International Program at Friends of the Earth. Friends of the

Earth is a national environmental organization and a member of

Friends of the Earth International, which is the world’s largest environmental federation with more than one million members in 70

countries.

We believe that international trade and investment can and

should be supportive of environmental protection. However this

agreement lacks adequate environmental provisions and also includes provisions that would themselves directly undermine hardwon environmental protections. Because of CAFTA’s negative implications for environmental protection, a wide range of major U.S.

environmental organizations and dozens of environmental groups

in Central America oppose this CAFTA.

CAFTA is an extremely important trade agreement in environmental terms. Central America is one of the most bio-diverse regions on the planet with more than 8 percent of all living species

in the world. The region has already lost more than 70 percent of

its forest cover and urban and rural pollution are rampant. Unfortunately, however, essential environmental protections are lacking

in much of the region. For instance, in its own environmental review of the agreement, USTR itself determined that Guatemala

and Honduras are lacking basic environmental laws. And most

countries in the region have disjointed and under-funded policies.

CAFTA would only exacerbate the existing problems in the region by opening Central America to substantial changes in industrial and agricultural development, many of which would worsen

the environmental situation if left unregulated.

Unfortunately, the agreement’s environmental provisions are inadequate to this task. First, CAFTA does not mandate any country

to adopt or maintain a set of basic environmental laws, a serious

omission given the weak environmental standards that are currently in place. Only one environmental provision, as in the labor

chapter, that countries enforce their already-existing laws as subject to dispute settlement, and there is a lack of parity between

commercial and environmental provisions, in dispute settlement, a

clear step backward from the U.S.-Jordan agreement.

The environmental provisions also include numerous loopholes,

for instance, the requirement that countries enforce their own laws

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does not even apply to laws whose primary purpose is natural resource manage, such as forestry management laws.

The agreement also includes no guarantees of a permanent, dedicated, and adequate source of new funding for environmental capacity building. And interestingly, the Bush Administration, in its

fiscal year 2006 budget zeroed out any funding for capacity building for the region connected to CAFTA.

In addition, although CAFTA includes a citizen submission process that you heard about from Ms. Vargo to allege enforcement failures, it doesn’t provide for any clear outcomes or actions to ensure

enforcement of environmental laws through that system.

Moreover, this lack of outcomes from the system is in stark contrast to the monetary compensation that private investors can demand of governments under the investor rights rules in CAFTA.

And let me now turn from the ways in which the environmental

provisions are lacking to the ways in which other aspects of the

agreement directly undercut environmental protection. And I will

focus here on the investor suit rules found in chapter 10 of CAFTA.

These are similar to NAFTA’s chapter 11, rules which have allowed

foreign investors to challenge environmental and public health

standards before international tribunals, bypassing domestic

courts, and providing rights that are nonexistent in the U.S. or in

other countries.

Under NAFTA, Mexico and Canada have already lost chapter-11

challenges to domestic environmental protections, and the U.S. has

spent millions of dollars defending itself against environmentally

related claims, totaling more than $1 billion. With CAFTA, the

threat of these challenges could chill the further development of

much-needed environmental standards, especially, of course, for developing Central American countries and the Dominican Republic.

During debate over the Trade Act of 2002, a mandate requiring

that trade agreements should give investors no greater substantive

rights than U.S. citizens have under U.S. law was introduced into

the requirements for USTR’s negotiations. Unfortunately, however,

CAFTA would still provide foreign investors with rights to challenge environmental protections that go far beyond the rights in

U.S. law.

Contrary to what Ms. Vargo said earlier, in revising the investment rules, USTR cherry-picked a few legal standards from a single Supreme Court case, taking those standards completely out of

context, and ignoring many key principles from U.S. Constitutional

Law, including some key principles from that same Supreme Court

case that she mentioned, Penn Central.

Let me conclude by saying that DR-CAFTA will have serious impacts not only in Central America. It will set critical parameters

for broader U.S. trade policy, including regional agreements such

as the FTAA. Unfortunately, we believe that this agreement sets

our trade policy on a wrong and unsustainable course for the environment.

[The prepared statement of David F. Waskow follows:]

PREPARED STATEMENT OF DAVID F. WASKOW, DIRECTOR OF THE INTERNATIONAL

PROGRAM, FRIENDS OF THE EARTH

Thank you for the opportunity to testify before the Subcommittee today concerning the proposed Free Trade Agreement with five Central American countries

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and the Dominican Republic (DR-CAFTA). Friends of the Earth is a national environmental advocacy organization and a member of Friends of the Earth International, the world’s largest grassroots environmental network, with more than one

million members in 70 countries worldwide.

We believe that international trade and investment can and should be supportive

of environmental protection. However, this agreement’s lack of adequate environmental provisions threatens the environment and public health in one of the world’s

most environmentally sensitive and biologically rich regions. Moreover, DR-CAFTA

would undermine hard-won environmental protections by allowing foreign investors

to challenge environmental laws and regulations in all of the countries, including

the U.S., that are parties to the agreement. Because of DR-CAFTA’s negative implications for environmental protection, a wide range of major U.S. environmental organizations, together with dozens of environmental groups in Central America, oppose this agreement.

DR-CAFTA is an extremely important trade agreement in environmental terms.

My comments will focus on Central America, one of the most biodiversity rich regions on the planet, with more than 8% of all living species in the world. Four of

the five Central American countries included in DR-CAFTA have tropical areas

identified as ‘‘critical regions’’ that require the protection of biodiversity. Three out

of four migratory bird routes in the Western Hemisphere pass through the DRCAFTA countries, making the forests in this tiny strip of land an essential habitat

for the survival of 225 species of birds.

In the midst of already fragile ecological zones, Central America is battling with

a wide range of environmental problems. Central America has already lost more

than 70% of its forest cover, and the depletion of forests has led to increased soil

erosion, the deterioration of watersheds, and decreased biodiversity. Urban pollution, including air pollution, low levels of sewage and solid waste treatment, and

chemical and pesticide runoff into water supplies, are rampant.

Unfortunately, essential environmental protections are lacking in much of the region. For instance, in its Environmental Review of the agreement, USTR itself determined that Guatemala and Honduras are lacking even the most basic environmental laws, such as protections for water, forests, sanitation, and biodiversity.

Most countries in the region have disjointed and under funded policies that have

led to severe environmental degradation.

DR-CAFTA would only exacerbate the existing problems in the region by opening

Central America to substantial changes in industrial and agricultural development,

many of which would worsen the environmental situation if left unregulated. Unfortunately, DR-CAFTA’s environmental provisions are inadequate, contain numerous

loopholes, and would not improve environmental protection.

DR-CAFTA does not mandate any country to adopt and maintain a set of basic

environmental laws and regulations, a serious omission given the weak environmental standards currently existing in much of the region. Only one environmental

provision—that countries effectively enforce their already existing laws—is subject

to dispute settlement, and the agreement fails to provide parity between enforcement of commercial and environmental provisions, a clear step backward from the

U.S.-Jordan Free Trade Agreement.

The environmental provisions also contain numerous loopholes. For instance,

countries can evade the requirement to enforce their environmental laws through

an escape hatch that allows them to use enforcement resources as they see fit. None

of the agreement’s provisions apply to judicial decisions, even including repeated

failures by a country’s court system to enforce environmental laws. And the requirement that countries enforce their own laws does not apply to any laws whose ‘‘primary purpose’’ is natural resource management, such as a forestry management

plan.

Given the numerous environmental challenges facing Central America, DRCAFTA ought to be accompanied by firm commitments to meet the capacity building

needs of these countries, backed up by a permanent, dedicated and adequate source

of new funding not taken from already existing programs. Unfortunately, the agreement includes no such funding. And the recently appended Environmental Cooperation Agreement fails to ensure anything more than the establishment of a multiagency commission without even a required mandate for specific cooperative activities to improve environmental protection.

In addition, although DR-CAFTA establishes a citizen submission process to allege enforcement failures, it does not provide for any clear outcomes or actions to

actually ensure that citizens of the region can achieve enforcement of environmental

laws. In a step backward from NAFTA, the secretariat charged with oversight of citizen submissions is an economic institution with no environmental expertise. Moreover, the citizen submission process’ lack of enforcement tools contrasts starkly with

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the monetary compensation that private investors can demand of governments

under DR-CAFTA’s investor suit rules.

The investor suit rules, found in Chapter 10 of DR-CAFTA, pose a substantial

threat to environmental protection in all of the agreement’s participating countries.

These investor suit rules are similar to NAFTA’s Chapter 11, which has allowed foreign investors to challenge environmental and public health standards before international tribunals, bypassing domestic courts. Using these rules, which provide foreign investors broad rights that do not exist under U.S. or other countries’ laws,

multinational investors have been able to demand compensation for the implementation of legitimate environmental protections.

Under NAFTA, Mexico and Canada have lost Chapter 11 challenges to domestic

environmental protections, and the U.S. has already spent millions defending itself

against claims totaling more than $1 billion. The challenges thus far have involved

a wide range of concerns, including hazardous waste, toxic gasoline additives, mining remediation measures, and food safety requirements, as well as many other public interest protections.

With DR-CAFTA, the threat of these challenges could discourage the further development of much needed environmental standards, especially for developing Central American countries and the Dominican Republic. Attempts to improve environmental standards in Central America could be chilled by the impending threat of

investor litigation before international tribunals.

During debate over the Trade Act of 2002, many members of Congress, including

several on the Energy and Commerce Committee, raised significant concerns about

the provisions in NAFTA Chapter 11. The Trade Act of 2002 requires that trade

agreements give foreign investors ‘‘no greater substantive rights’’ than U.S. citizens

have under U.S. law. In introducing the relevant amendment, Senator Baucus instructed USTR to place a ‘‘ceiling’’ on investor rights at the level of U.S. law.

Unfortunately, however, DR-CAFTA would still provide foreign investors with

rights to challenge environmental protections that go far beyond the rights provided

under U.S. law. In its supposed fixes to the agreement’s investment provisions,

USTR cherry picked a few legal standards from a single Supreme Court case, taking

those standards completely out of context and ignoring many key principles from

U.S. Constitutional law.

The agreement continues to allow foreign investors to assert that environmental

laws have caused an ‘‘indirect expropriation,’’ or regulatory taking, of their business

interests or have violated a ‘‘minimum standard of treatment’’ in a wide range of

circumstances that would not be compensable in U.S. courts. For instance, the

agreement does not include the critical Supreme Court principle that a governmental action must permanently interfere with a property in its entirety in order

to constitute a taking. Nor does DR-CAFTA ensure the Constitutional principle that

the government can regulate a public nuisance—such as pollution released from a

property—without compensating the property owner.

In several critical respects, DR-CAFTA’s investor suit rules also provide investors

rights greater than those found in NAFTA. DR-CAFTA expands the definition of an

‘‘investment’’ to cover a wide variety of economic interests that go far beyond what

is considered property in U.S. law regarding regulatory takings. The agreement also

explicitly grants foreign investors the right to challenge any aspect of government

decisions about natural resource agreements, such as federal oil, gas, and mineral

leases.

Finally, I would like to touch on two key additional concerns regarding the agreement: agriculture and intellectual property. One of DR-CAFTA’s most significant

impacts is likely to be the dumping of subsidized U.S. agricultural products on Central America, a practice that under NAFTA drove small-scale farmers off their land

and impoverished many others. In Mexico, this forced many small farmers to clearcut forest areas to provide increased farming opportunities or replacement sources

of income, while industrial farms have increased the levels of nitrogen and other

pollution. Under DR-CAFTA, impacts for the millions of Central American small

farmers whose livelihoods depend on the agricultural sector are likely to be similarly harmful.

DR-CAFTA’s intellectual property rules, which go beyond World Trade Organization requirements, could threaten the region’s biodiversity and put the rights of

small farmers and indigenous people at risk. By requiring the patenting of a wide

range of life forms, the agreement creates potential conflicts with the Convention

on Biological Diversity and could limit the ability of small farmers to maintain traditional practices, such as seed saving, which help protect and sustain agricultural

biodiversity. In addition, DR-CAFTA could impede efforts to ensure that the origins

of traditional community knowledge utilized in seeds and medicinal treatments are

fully acknowledged and appropriately compensated.

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Let me conclude by saying that DR-CAFTA will have serious impacts not only in

Central America. It will set critical parameters for broader U.S. trade policy, including regional agreements such as the Free Trade Area of the Americas (FTAA). Unfortunately, we believe this agreement sets our trade policy on a wrong and

unsustainable course for the environment.

Mr. STEARNS. I thank the gentleman. And I will start with my

questions for the third panel. Mr. Roney, I think you heard Mr.

Roberts. Is there anything you would like to—because he is saying

that pretty much this agreement, the only person that is sort of on

the outs on this agreement is the sugar industry. And the implication is also that under this agreement, that sugar would get a better deal than they are now getting. So you might want to reply to

what he is indicating that why you wouldn’t be better off with this

agreement, and really, considering you are the only one, I think

Mr. Roberts is saying you have had inordinate persuasion on this

bill. Is that what your words were, something to that effect that

there has been—considering there is only 60,000 employees, you

said, of the sugar industry, that the sugar industry has had a pretty much a vocal opposition to it. And so Mr. Roney, I would give

you an opportunity to answer.

Mr. RONEY. Thank you very much, Mr. Chairman. I do appreciate that because I think the professor is very right about baseball

but he is very wrong about sugar in quite a number of areas.

In terms of our holding the agreement hostage, it is quite the

other way around. We are being held hostage by it. It is wrenching

open our market without adjusting any foreign subsidies. And in

terms of the opposition to the CAFTA, it is extremely widespread.

Polls show the majority of Americans oppose it. The labor and environmental movements that you have heard from today are opposed

to it. A broad range of religious, human rights groups here and in

the Central American countries are opposed to it, as is much of

American agriculture, contrary to what we have heard earlier.

There are quite a number of large U.S. agricultural groups who are

opposed to it.

The professor is also wrong about our competitiveness. We are

among the most competitive producers in the world. Our beet sugar

producers are the third most competitive out of 41 countries, and

our cane producers are 26 most competitive out of 64 countries, despite the fact that we are facing much, much higher labor and environmental standards than other countries.

And the other most egregious area was on consumer prices for

sugar in this country. And there is quite a bit of information on

this in my full testimony, which I will recommend to Dr. Roberts

because what we have shown is that the foreign consumer prices

for sugar are 30 percent higher than here. And then in terms of

affordability, sugar is more——

Mr. STEARNS. When you say foreign, you mean European or

Latin American?

Mr. RONEY. The work that we have done focuses in actual prices

in developed countries. Abroad, it is the developed country

average——

Mr. STEARNS. Okay.

Mr. RONEY. [continuing] is 30 percent higher——

Mr. STEARNS. Okay.

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Mr. RONEY. [continuing] and then globally taking various per

capita incomes into account in terms of minutes of work required

to buy a pound of sugar. And there are charts in here that demonstrate this. Our sugar is the most affordable in the world.

Mr. STEARNS. Mr. Waskow, you know, the argument seems pret- ty strong that this agreement is only worth about $77 billion, or

about the GDP of Sacramento, California. And relative in the big

scheme of things, you know, we are saying don’t support a fasttrack agreement for a very small number of agreements. I mean,

relative—and then it was also pointed out by Mr. Murphy when he

indicated that the best is often the enemy of the good. I mean,

couldn’t this agreement—you can’t get a perfect agreement, but

certainly with such a small number of nations, wouldn’t it just be

goodwill to go ahead and try and move forward, realizing that the

best is not the enemy of good and perhaps we can perfect it as we

go?

Mr. WASKOW. Well, if we thought that this agreement on net

were going to be positive for the environment and Central America

and the United States, I would perhaps say yes——

Mr. STEARNS. But remember, you——

Mr. WASKOW. [continuing] but——

Mr. STEARNS. [continuing] cannot influence anybody if you don’t

have a dialog and you don’t trade with them. And right now they

are getting a free ticket in here but we don’t get a free ticket into

theirs. So wouldn’t we be able to influence them a little bit if we

had a trade agreement and they were buying more of our products

and just the set up that the trade organization has set up here in

the CAFTA agreement? Wouldn’t that be some kind of influence to

get a better environmental situation than we now have?

Mr. WASKOW. Well, I would just draw on the lessons that many

of our colleagues in Central America have come to, and that is that

this agreement is bad for environment and development in Central

America. It will not provide benefits in a substantial way to the

economy given as Ms. Vargo herself said, that market access to the

U.S. economy is almost as great now under CBI as it would be

under CAFTA. Perhaps selling products there would somehow benefit the environment, but in fact I think the likelier outcome is that

selling—and this is a controversial question, of course—but our

selling highly subsidized agricultural products to Central America

could have a quite problematic effect for the environment.

We have seen with NAFTA that the subsidized dumping of corn

into Mexico has displaced many small farmers, and unfortunately,

what that has led to is increased deforestation rates as those farmers try to supplement their incomes or to clear additional agricultural land when they are impoverished.

So in fact what our colleagues have determined is that this will

not be a beneficial agreement for their environment or development.

Mr. STEARNS. Dr. Roberts, you have your Ph.D. in economics

and——

Mr. ROBERTS. Yes.

Mr. STEARNS. [continuing] in the opening statement I talked

about Ricardo and his comparative advantage——

Mr. ROBERTS. Was a thrill for me——

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Mr. STEARNS. Yes.

Mr. ROBERTS. —Mr. Stearns——

Mr. STEARNS. Okay.

Mr. ROBERTS. [continuing] I have to tell you.

Mr. STEARNS. And so I went to my staff and I said well, didn’t

Adam Smith and the ‘‘Wealth of Nations,’’ didn’t he come up with

this concept before Ricardo? And I guess he talked about free trade

in his ‘‘Wealth of Nations.’’ Which one is it from an academic standpoint is considered the one, the free-marketer in terms of comparative advantage?

Mr. ROBERTS. Well, Adam Smith really was talking about what

is usually called absolute advantage, and he was emphasizing the

fact that even if we are all alike, there are values to specialization.

I don’t want to do everything for myself. I am going to rely on you

and cooperate with you via trade, and if we have the same skills.

That was Smith’s deep insight as to how that creates wealth. Trade

and exchange and relying on others, cooperating with others, which

is what trade is all about, creates wealth.

But there is another aspect to trade, which is diversity, which is

the fact that you and I may not be the same. You may have certain

things you are good at and certain things I am going to be better

at than you. And what Ricardo’s great insight was was that even

if I am better at everything than you are—or let us reverse it—

even if you are better at everything than I am, it still is worthwhile

for you to trade with me. I will benefit even though you are better

than I am at everything, because by specializing, you will be able

to do—use your resources, your time, your energy much more effectively. That was Ricardo’s deepest insight was that when we are

different, even if I am bad at everything, by letting you specialize

and letting me do some things for you, you will be better off and

I will be better off.

So for example, even if you are the best typist in the world or

the greatest lawn cutter in the world, you might outsource those

jobs outside your household. You might rely on others to do those

jobs. You might let someone cut your lawn, someone do your typing, someone to change the oil in your car, even if you were phenomenal at it, because that will free up your time to do something

you are even better at. And that is really what Ricardo’s insight

was. It is not intuitive, and I would suggest that it has not quite

made its way fully into the consciousness——

Mr. STEARNS. And I——

Mr. ROBERTS. [continuing] of the American people.

Mr. STEARNS. [continuing] appreciate your definition, and I think

going—when I asked a question to Mr. Waskow, that when this

happens in this dialog with this other country, you actually influence them and they influence you. And there is a modicum of crossthe-board influence.

Mr. ROBERTS. And you change the way that you organize your

economic life and you change the way you organize your political

life. And I think the political impact is extremely important for

these countries that have struggling democracies.

Mr. STEARNS. And let me ask you one other question. My time

has expired. I hear lots of times that the deficit, the trade deficit

is bad.

112

Mr. ROBERTS. Yes.

Mr. STEARNS. And I think the arguments are made before

NAFTA we had a surplus, and after NAFTA we had huge deficits

even though NAFTA contributes a smaller portion. And Mr. Brown

from Ohio has a graph he shows——

Mr. ROBERTS. Chromatic chart, yes.

Mr. STEARNS. [continuing] and how do deficits—trade deficits affect our economy and what does that mean? Should we, as Congressmen, be concerned that this might add to the trade deficit,

this CAFTA agreement?

Mr. ROBERTS. Well, no economist who is not under the pay of a

special interest. That is, virtually every academic economist thinks

that trade deficits are relatively unimportant for the economy and

for the job picture in the United States, which is counterintuitive.

It is not what you will hear from a lot of lobbyists and special

interest——

Mr. STEARNS. Because people are arguing that is why the dollar

has gone relative to the European Union. But the European Union

has high unemployment, they have deficits themselves, they——

Mr. ROBERTS. Well, yes——

Mr. STEARNS. [continuing] so I just——

Mr. ROBERTS. [continuing] Well, to make it simple what a trade

deficit is mirrored by is a capital surplus; that is, a trade deficit

means we import more from our neighbors than they import from

us. At the same time they are investing more in our economy than

we are investing their. Why is that? Because we are a phenomenal

place to invest and a great place to take risk relative to the rest

of the world. As long as that is true, as long as the United States

is a productive and stable environment for investment, we will run

a trade deficit year in, year out, maybe with some countries and

not with others, but our net trade deficit will be negative in goods.

And that will be a sign of economic health——

Mr. STEARNS. So trade deficit——

Mr. ROBERTS. [continuing] one——

Mr. STEARNS. [continuing] in your opinion is——

Mr. ROBERTS. Irrelevant.

Mr. STEARNS. [continuing] is a positive sign?

Mr. ROBERTS. Irrelevant or positive. One last statistic, since the

mid-’70’s we have run a trade deficit every single year. It adds up

to trillions of dollars. These numbers we hear about how many jobs

are lost for every $1 billion of trade deficit or jobs that are created

for surplus, those numbers are meaningless; they are not true. It

would require us to have created something like—by the way, since

those mid-’70’s our economy has created 50 million jobs in the face

of those trade deficits. So the proponents who tell us that trade

deficits hurt jobs, they suggested we would have created an extra

20 or 30 million jobs. Where would they come from? Who would be

drawn into the labor force? Children? 80-year-olds? The job market,

the labor market, the number of jobs in the United States is determined by our skills and our willingness to work, not by our trade

deficit per se. Totally irrelevant.

Mr. STEARNS. If you go back in history and you look at the start

of this country in the 18th century and the 19th century, what

were the trade deficits back then?

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Mr. ROBERTS. Well, when we were getting investment, we were

running a trade deficit, but a more dramatic example is England,

from 1850 to 1970, which is 120 years, which were glorious years

of economic history for England, by the way——

Mr. STEARNS. Those were the golden years of England.

Mr. ROBERTS. Mostly time of tremendous economic growth, tremendous job growth, they ran a trade deficit 119 of the 120 years.

So we will hear it is not sustainable. That is pretty sustainable.

119 out of 120 years, 1 year, I don’t know what was wrong with

that year. I suspect it was a data error entry, a typo on the chart,

but for 119 out of 120 years when England was the most powerful

economy in the world, they consistently ran a trade deficit because

they were a good place to invest. That will be true for the United

States as well.

Mr. STEARNS. And my time has expired.

Ms. SCHAKOWSKY. England was also a colonial power that

enslaved entire nations at the time. I just wanted to point that out.

Mr. ROBERTS. They had some negatives. That is true.

Ms. SCHAKOWSKY. I just thought I would——

Mr. ROBERTS. Big ones.

Ms. SCHAKOWSKY. [continuing] point that out. Yes. I wanted to

say something to ask a question of Mr. Murphy. Your organization

and the Chamber of Commerce have been citing a study that was

sponsored by the Chamber that you say demonstrates that CAFTA

would increase U.S. employment and increase income nationally.

There are a couple things about the report that I wanted to ask

you, which in fact is the only economic modeling that we have seen

that tries to show that the U.S. would gain jobs from CAFTA.

I want to you ask you, does it seem like a reasonable assumption

that under CAFTA the United States would not see any increase

in imports from Central America? Because that is one of the assumptions of the study.

Mr. MURPHY. The study is based on a model that has been

around for a long time. It is called a RIMS-II study. It is widely

use at the Department of Commerce and other places. The model—

basically you come up with certain assumptions. For instance, we

started by making some very conservative assumptions about export growth from the United States to the region. We took what we

saw last year with the Chile agreement of 33 percent export growth

and we cut it in half and we posited out what that would mean

using multipliers that the government provides for different sectors. You know, if you have $1 billion of exports, what does that

mean in terms of job creation in the computer sector in a different

industrial sector.

And that is the State-by-State studies that we have been doing,

and some of the numbers are quite impressive, for instance, for

Florida, which has very large trade with the region. We did not explore the import side for the reasons that have been discussed

quite broadly here today, that the U.S. economy has essentially already paid the price for opening up our economy to imports from

this region. The fact that 99 percent of agricultural goods are already coming in duty-free, we don’t expect to see a huge surge in

agricultural goods. The fact that 80 percent of manufactured goods

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come in duty-free, that we don’t expect to see a huge surge in that

category. Whereas in the other direction, the tariffs are quite high.

Ms. SCHAKOWSKY. So you don’t think that figuring in imports—

you think there will—so you are saying there will be no increased

imports?

Mr. MURPHY. I think that as economic growth proceeds, there are

increases in imports, but for the purposes of the study, projecting

that out, we looked at the export side. But I think——

Ms. SCHAKOWSKY. So they weren’t necessarily net exports, I

mean, in terms of impact on the economy?

Mr. MURPHY. Yes. But I think one of the important things you

have to say about imports is that one shouldn’t look at imports as

a net negative. After all, look at the Chile agreement, one of

the——

Ms. SCHAKOWSKY. No, I am just saying they weren’t really considered at all.

Mr. MURPHY. Right, precisely because we expect it to be quite a

low number, an extremely low number given how open the U.S.

economy already is——

Ms. SCHAKOWSKY. Our staff——

Mr. MURPHY. [continuing] across the——

Ms. SCHAKOWSKY. [continuing] ran some numbers on the export

side, and what they found was that in order for CAFTA to create

jobs in the United States, to actually make progress in job creation,

if you look, just for example, at Honduras, you would have to assume export gains for U.S. companies and farmers to essentially

have 80 percent of the Honduran economy absorbed by the United

States exports in 10 years. I mean, just enormous amount of exports that it would amount in figures to 80 percent of the Honduran economy.

I mean, do you think it is realistic to think that we could displace 80 percent of another country’s economy in terms of money

that we would gain?

Mr. MURPHY. I think that if you look at the statistics on what

the U.S. already sells to this region, it is remarkable what great

customers they are. I think it is about 70 percent of the non-oil imports that go to these countries is coming from the United States.

And as we see these economies grow, we expect those numbers to

continue also to grow a great deal. Now I can’t speak very specifically to your analysis. I would be very happy to look at it.

Ms. SCHAKOWSKY. Okay, that would be good. I would appreciate

that. I wanted to ask a question briefly about the environment and

my concern about questions of U.S. sovereignty and our ability to

even enforce our own environmental laws. I wonder if you could expand a little bit on that.

Mr. WASKOW. Sure. And in fact groups ranging from the National League of Cities to the Conference of State Chief Justices

have raised significant concerns about the investor suit rules in

these agreements I think it is coming from a whole array, including

a bipartisan array, of local and State-elected officials around the

United States.

And, in essence, what the concern is is that these rules provide

a tool for foreign investors to essentially challenge and undermine

legitimate environmental—and frankly, not just environmental,

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other public interest standards as well by demanding compensation

from the U.S. Government when the foreign investors claim that

their business interests have been affected in some manner.

And what this does is essentially place significant pressure on

State and local governments. And we have seen just recently Governor Schwarzenegger veto a bill that would have required recycling of crumb rubber in California for road use because of concerns

about the effect of NAFTA and whether NAFTA would in fact overrule the attempt to do that recycling. And so I think that it is quite

a well-placed concern on the part of those State and local officials.

Ms. SCHAKOWSKY. Thank you. And thank you for that example

as well.

Mr. STEARNS. Mr. Otter.

Mr. OTTER. Thank you, Mr. Chairman. Mr. Roney, the administration has insisted that there is a cushion that permits them to

grant the CAFTA countries additional access to the U.S. sugar

market without interfering with the operation of U.S. sugar policy.

And you say that there is no such cushion. Can you explain the difference between your position and the administration’s position?

Mr. RONEY. Yes, I can. Thank you, Congressman. The administration seems to have a peculiar case of selective amnesia about

what it has already committed to do in the NAFTA. But in the

NAFTA the administration added to commitments that it had already made in previous trade—in the Uruguay Round of the WTO.

It added a commitment to import up to a quarter million tons of

sugar from Mexico when Mexico has that sugar to export, regardless of whether we need the sugar or not. That is on top of the one

and a quarter million tons that we are committed to import from

41 countries on the WTO.

Now, what has happened in the last couple years is that Mexico

has had a couple of short sugar crops and has not had the sugar

available to send to us. And so our actual imports were coming in

below this one and a half million tons that the Congress essentially

decided in the 2002 Farm Bill was an adequate amount of access

guaranteed to foreign countries.

And the administration looked at the sugar that was not being

imported from Mexico and said oh, well, this gives us room or a

cushion to grant additional access to the CAFTA countries, completely forgetting that Mexico could, any month now, resume shipping that sugar to us. And indeed this year Mexican sugar crop is

coming back substantially, and we would not be surprised in the

coming year if they didn’t send us the full amount that they are

allowed to.

Mr. OTTER. Which is 276,000 tons?

Mr. RONEY. Exactly, yes. And——

Mr. OTTER. You feel confident that they will then use their full

quota to come back into the United States?

Mr. RONEY. I would expect that they would——

Mr. OTTER. Then what happens in 2008 with Mexico?

Mr. RONEY. In 2008 it gets even worse because then the 276,000-

ton limit comes off. We have free trade with Mexico. Mexico, beginning in 2008, if they wanted to, could send us all their sugar production and import off the world dump market to satisfy their domestic needs. That is a train wreck that is on the way, and we are

116

trying to work out negotiation with Mexico to avoid that. The

CAFTA will just make that worse.

Mr. OTTER. Are you familiar with their policy of importing sugar

into Mexico, but not allowing any of that imported sugar to go into

value-added products such as candy bars, cake mixes, and those

kind of things unless it is going to be exported?

Mr. RONEY. Yes, that is through a re-export program set up by

Mexico and by the U.S.

Mr. OTTER. And, of course, we are going to continue with that

program?

Mr. RONEY. We would expect so, yes.

Mr. OTTER. What is the world sugar price right now?

Mr. RONEY. About 9 cents per pound.

Mr. OTTER. Now, 2 years ago I was in Cuba and visiting with

Castro with the Cuban government, and he just indicated they had

shut down 78 sugar plants. I said, well, that was a very capitalistic

move. Why did you do that? He said well, because I can buy sugar

on 3 cents and it costs me 4.5 cents to produce it. And I said again

to him, well, that was a very capitalistic move. He said I can get

all the sugar I want for 3 cents. So why would that 3-cent sugar

go to anyplace else in the world except the United States if we

opened our markets?

Mr. RONEY. Well, that is the problem, Congressman, is that there

is a lot of this dump-market sugar floating around out there. No

one in the world, and I think Mr. Castro was dreaming when he

said they could produce sugar for as low as 4.5 cents per pound.

They have an antiquated sugar industry there. With cost of production they are probably doubled.

Mr. OTTER. Yes, but they also have slave labor.

Mr. RONEY. They have that. They have got some low labor costs

and antiquated equipment and probably very high——

Mr. OTTER. Actually, it is not slave labor. It is all government

employees.

Mr. RONEY. Yes, and——

Mr. OTTER. So there is a difference. Mr. Roberts, I am interested

in your economic—I remember when I was taking economics, I

think it was Economics 101 back in college, and my college professor said one time, who was a real free market advocate, not unlike, say, a Friedrich Hayek or Milton Friedman—anyway, he said

that, you know, if every government economist were laid end to

end, it would probably be a good idea. I am not sure I totally agree

with that, but I would say it is not unusual for us to constantly

be bombarded with conflicts between government economists and

free market economists. Tell me why that is.

Mr. ROBERTS. Well, first, again, I have to say that to have a

hearing with David Ricardo, Adam Smith, Friedrich Hayek, and

Milton Friedman’s name mentioned, is it a first or is this commonplace?

Mr. OTTER. I hope it is not the last.

Mr. ROBERTS. Okay. It is an interesting world that we live in.

There is a lot of disagreement in economics about lots of things.

There are a lot of issues about how big certain effects are. Some

effects I might think are large; someone else might say no, they are

small. So economists disagree about a lot of things, but there are

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many things that economists actually agree on. One of them is

about the benefits of trade for both parties. And the people who are

against trade, who put the label economist on their business card,

tend to be economists who are paid for their positions rather than

people who are free, either because they are in the academic——

Mr. OTTER. Wait a minute. You mean they are free because they

are government employees?

Mr. ROBERTS. No, I am not talking about government economists.

Mr. OTTER. Oh.

Mr. ROBERTS. I am talking about people you will hear representing various industry groups, various labor unions, people

who are paid to take a position basically. Those are the people you

will hear day in, day out. They will come through your office to tell

you about how dangerous trade is and how bad trade deficits are.

But the economists who are disinterested, free trade and otherwise, on the left and the right, Democrat and Republican, overwhelmingly agree that trade is good for both sides and that trade

deficits do not cost us jobs. The people who you were hearing are,

I would argue, not a representative sample of the economics profession. The other side, the so-called free marketers, include Democrats, Republicans, people across the ideological spectrum. But they

are not in the employ of special interest.

Mr. OTTER. My time is up. And, Mr. Chairman, thank you. I

would only—I need your answers because I have got 14,000 lumber

workers that are out of business because of Canadian Softwood

Lumber Agreement. I really need to be able to convince them that

they are better off——

Mr. ROBERTS. Well——

Mr. OTTER. [continuing] now because of NAFTA.

Mr. ROBERTS. Well, not everybody is going to be better off. I

mean, no economist has ever said that. The question is, who is

going to benefit at whose expense. And the sugar beet farmers that

you are worried about, and I understand your worry, are taking

money out of my pocket right now. And this agreement will keep

that money flowing into their pocket. And I understand that they

are going to tell you how bad it is for their livelihood that CAFTA

is going to pass and increase U.S. imports by 2 percent over 15

years. The fact of the matter is that is making me pay more for

my sugar, for my cereal, for my candy, my ketchup, et cetera.

And I understand your self-interest. You have got to protect

those jobs. But the overall, people who are paying for that are the

rest of the country.

Mr. OTTER. Thank you, Mr. Chairman.

Mr. STEARNS. I thank the gentleman. The gentleman from Ohio.

Mr. BROWN. Thank you, Mr. Chairman. I would like to tell an

anecdote, a story, and then a question. The anecdote, before we go

too far about Adam Smith, you should remember that Adam

Smith’s last job before his death was a tariff collector in Scotland.

And I also would add to Dr. Roberts that Paul Samuelson, who was

probably not on any industry payroll, has written a paper that he

was generally wrong on free trade all these years. And that to say

that no reputable economist—I mean, there are dozens of reputable

economists that don’t agree with your position on trade. But that

is neither here nor there.

118

A couple of guys from my staff, both are sitting behind me,

toured a big steel problem last month in Baltimore I believe. And

they told a story that bears on what we are talking about. I would

like to tell the story and then ask each of you just to respond to

a question, all four of you. They were taking a bus ride from one

plant to another, and across the aisle on the bus was the plant

manager talking to another guy about their environmental protection efforts. The plant manager said—and this is a pretty direct

quote from the two people in my staff that listened—he said yes,

it is a big investment. We just spent $23 million to improve our

water emissions, we spent $43 million to improve our air emissions. And he said that is okay, though, because we all live here

too and we want this area to be safe for our kids. And then he

paused and he said I just wish that other countries had to play by

the same rules, that is all.

That is the point that a lot of us have made on this trade agreement by holding foreign countries to lower or nonexistent environmental standards. Trade agreements like CAFTA not only harm

the environment, they harm our competitiveness. How do you compete with that?

And my questions are for each of the four of you, starting with

you, Mr. Roney. Is that plant manager right and should we insist

on a level playing field for environmental protections as well as intellectual property and commercial protection?

Mr. RONEY. Yes, sir. We certainly should, and in farming it is

very apparent. I had a mill manager in Hawaii who had worked

in other mills in the developing world before he got there and said

that he was facing rules in Hawaii that he had never faced in any

other country in terms of cleaning the water, the muddy water that

left the mills before it could go out into the ocean. He had to invent

machinery that had never been made anywhere else in the world

just to get the mud out of the water before it went in.

Now, should we be put out of business by the countries that don’t

protect the water supply by the El Salvador industry? It employs

child labor that is well-documented. Should we be put out of business while we are adhering to the highest labor and environmental

standards in the world and these other countries continue? I am

a recovering free trade economist because I have seen how the real

world works. I see how governments play roles that—directly subsidizing or indirectly subsidizing by not putting labor and environmental standards on their workers and disadvantaging those countries that do care about those things.

Mr. BROWN. Dr. Roberts.

Mr. ROBERTS. Yes, I am glad to add Paul Samuelson to the illustrious list of economist who have been mentioned today and would

love to see—if you would please send me that paper, I would be

anxious to see it.

On the comment on the steel workers and the steel industry, we

do have different standards than the rest of the world, but, of

course, many U.S. steel producers compete very effectively with

those standards in place. The mini-mills, for example, through innovation and technological creativity were able to be competitive

with the rest of the world. Unfortunately, the large steel mills——

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Mr. BROWN. The question is not about the steel mills; the question is should Central American countries have the same environmental standards as we do——

Mr. ROBERTS. I think not. I think not because we would impoverish them if we did. The reason they don’t have the same standards we do is because they are much poorer than we are and they

can’t afford the same standards that we do. To impose those standards on them is to keep them poor. And I think that is a cruel policy. And I think we can compete in the face of that disparate regulatory environment as the mini-mills have shown we can do. So I

think it would be a mistake to force them to live by our standards.

Mr. BROWN. Mr. Murphy.

Mr. MURPHY. I think one of the interesting ways to look at the

choice that the Congress faces is to think about the different outcomes if DR-CAFTA is approved or rejected. If the agreement is rejected, and I think this goes to the question here, it is American

businesses and workers and farmers who will continue to face

these high barriers to their exports while the Central Americans

will not. It is interesting to look at the working conditions of the

workers in Central America. What incentive would the governments have to improve their working conditions? To say nothing of

the fact that increased competition in the global economy, especially in the apparel and textile industry, is only going to increase.

And without CAFTA they will have even fewer resources and a

lessened ability to stay competitive and hold onto the markets that

they have. I do think that there is a clear fork in the road there.

Mr. BROWN. Mr. Waskow, if you would answer also. Thank you.

Mr. WASKOW. Sure. Well, let me begin by saying that I think

from the perspective of our colleagues in Central America, the cruelty—cruelty was just referred to—the cruelty would be for citizens

in those countries to continue to face serious water and air pollution, to see their forests deforested, to see small sustainable farmers pushed off their lands. That is the cruelty from the perspective

of our colleagues.

And I think one of the great ironies in this agreement is the fact

that the investor suit rules give companies, foreign companies, an

opportunity to essentially place a lid on the standards to which

those countries can aspire. Because a country, if it senses a threat

of a lawsuit from a foreign investor under these rules before an

international tribunal, it is quite unlikely, when they know that

millions of dollars in defense costs would be involved and possible

compensation paid, even greater amounts, that country, I think, is

quite unlikely to be ready at a moment’s notice to go forward with

environmental standards. And so what I think we see with this

agreement in fact is an imposed cruelty because the investor suit

standards cap what it is that Central Americans can do for their

environment.

Mr. STEARNS. Thank you. Mr. Gonzalez.

Mr. GONZALEZ. Thank you, Mr. Chairman. And the first question

will go to Dr. Roberts. And I think what we are always discussing,

and I think, in essence, I agree with some of the theories; it is just

that the practice can be brutal. The thing about creative destruction, it just depends if you are part of that that is being created

or that segment that is being destroyed at any given point. But it

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doesn’t mean that things get paralyzed either. We stay in the same

place. And those are really hard choices. Like I said earlier, in

Texas we always just say it depends whose ox is being gored. And

that is, as we can see through the testimony, generally that is what

is happening.

I was at a meeting about a month ago at the Greater Houston

Partnership, and Dr. Ray Perryman was there. And you are familiar with Dr. Perryman, I believe? You are not? Well, in Texas we

don’t do anything unless there is an economic study by Dr.

Perryman. And so what I asked him was, in the context of free

trade agreements, and specifically CAFTA, how much can we realistically accomplish in the way of human rights, workers’ rights,

and the environment? His answer was really very little. Very little

if you don’t take into consideration where they are in their economic development. And what he was basically telling me—and I

don’t want to put words in Dr. Perryman’s mouth—was, you know,

you guys need to get realistic about how much you can accomplish.

Because at one time in our history we had child labor.

Mr. ROBERTS. Sure.

Mr. GONZALEZ. And we didn’t have 40-hour weeks. And we polluted the heck out of the air and the water. And if you want to impose these certain conditions on emerging, developing economies,

you are crippling them. So you are going to have to be reasonable

when you go out there and recognize the realities. Now do you

agree with that kind of general assessment of Dr. Perryman?

Mr. ROBERTS. I do. I think the first thing to say though is on the

creative destruction point, it is easy to forget how dynamic our

economy is. Every quarter, every 3 months, the U.S. economy destroys about eight million jobs for a thousand reasons: companies

that take a wrong turn, consumers decide they don’t want to buy

something, they want low-carb instead of high-fat, trade issues, innovation, productivity changes. Eight million jobs a quarter. But

we create about eight million jobs a quarter. When the economy is

going well we create more than we destroy.

So that incredible dynamism is really the source of our prosperity and to me gives me a great deal of optimism about our ability to deal with changes that we are talking about or many of the

industries we are talking about are very, very small relative to the

size of the whole economy.

On the environmental issue I think you are exactly right. When

I was in Costa Rica, an incredible awareness there that their future lies with their environment. It is a gorgeous country. They

have rainforest, they have beautiful beaches. They want to see

tourism, and do see tourism as a tremendous source of their prosperity. They want to protect their environment, but they are very

poor. And I think it is very arrogant on our part to try to tell them

the pace at which they will make the transformation to what we

hope will be a healthier and richer society.

They are a democracy. They are desperately trying to become a

successful economy, make an incredible set of transitions that we

have already dealt with both environmentally, both in the job market. You know, 25 years ago their main crops were coffee and bananas. And now tourism is probably their—I don’t know if it is for

121

sure their No. 1 export, but I know coffee and bananas are no

longer as important as they used to be.

So they understand the world is changing. They are desperately

trying to make it happen, and we can’t dictate to them what pace

they follow, just like we wouldn’t like anyone to dictate to us.

Mr. GONZALEZ. Mr. Waskow. And I——

Mr. WASKOW. Thank you for the opportunity.

Mr. GONZALEZ. Sure.

Mr. WASKOW. I think all the evidence to date is that there is

really no fundamental conflict between environmental protection

and development. In fact countries can benefit themselves—I think

Costa Rica is an excellent example—by protecting their environment, that that provides great economic benefit.

I would also add that I agree in a sense that we should not be

dictating standards across the board. Unfortunately, I think that

the investor suit provisions in the CAFTA agreement do dictate

and do place a lid on the kind of environmental protections that

countries can seek to put in place. And so I think that is the dictation that is going on if you look at CAFTA, all the chapters in

CAFTA.

Mr. GONZALEZ. And I have 19 seconds. And each one of you, your

own read, because you always hear that NAFTA was a profound

failure. I am from Texas, and I have to tell you that it hasn’t been

in the State of Texas. And I am taking into consideration what has

been going on in Mexico and such.

Was NAFTA a good agreement? And I just—Mr. Roney?

Mr. RONEY. It has been bad for us, Congressman, because it is

forcing us to take Mexican sugar and the Mexican sugar industry

is half-owned by the government. So this isn’t exactly free trade

here. Rather than letting their mills go out of business, the government just expropriates them. And now they are trying to send—

they want to be able to send us their surplus. And the NAFTA will

allow them to. So it has been a bad agreement for us.

Mr. GONZALEZ. Dr. Roberts.

Mr. ROBERTS. Well, your State is one of the few States where you

can see the benefits. We all see the costs. We have heard from Representative Brown; we heard from others earlier about how their

State lost a certain number of jobs to NAFTA. What we didn’t

see—they are there. We can’t see the jobs that are created because

they are not created specifically in NAFTA industries. But when

we import stuff that is cheaper, that frees up resources for us to

do other things. Those other things that expand and create more

jobs, you are not going to be able to identify them as NAFTA jobs.

Surely every State that complained about job losses due to NAFTA

has increased employment since NAFTA passed. And I think much

of that—some of that, not much—a part of that was due to NAFTA;

you just can’t identify it.

So I think attempts to vilify NAFTA on the job issue are wrong.

It didn’t create jobs per se; it changed the kind of jobs we did. I

think that is good for us, good for Mexico, and the stability of the

Mexican democracy I think is the single most important result

from that. It is not totally stable obviously. It is not as stable as

the United States. But it is much more stable than it was 15 years

ago. And I think that is extremely important for us and for them.

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Mr. GONZALEZ. Mr. Murphy.

Mr. MURPHY. I think for the United States NAFTA has clearly

been a gain. As has been pointed out, you can’t see it everywhere

because the gains are so broadly distributed. And yet at the same

time you look at the past 10 years, we have had a net creation of

nearly 20 million jobs in this country. Incomes are rising, not incredibly quickly, but they are rising.

If you look at Mexico, though, it is a country very close to my

heart. I lived there for a couple of years. I am struck by basic statistics like seeing the consumption of chicken has doubled in the

past decade, the average consumption of chicken. The consumption

of pork is up 50 percent. You are beginning to see people start to

live better. Mexico came into NAFTA with tremendous rural poverty, and there is still tremendous rural poverty. But you are starting to see changes there, and it is very heartening.

Mr. GONZALEZ. Mr. Waskow.

Mr. WASKOW. I would say there are some marginal benefits, but

in general it has been a negative. Continued problems at the borders I am sure you are aware, deforestation and other problems

due to major shifts in the agricultural sector in Mexico, and the

significant legal and regulatory issues that have been raised by the

investor suit rules and other provisions in NAFTA.

Mr. GONZALEZ. Thank you very much. Thank you, Mr. Chairman.

Mr. STEARNS. Thank you. And we are getting ready to close. I am

just going to take the liberty, Dr. Roberts, just to talk to you a little bit more about economics, and you know this better than I do.

But there are cases when you—at least Adam Smith in ‘‘Wealth of

Nations’’ as I recollect said there is a reason for tariffs. And as I

recollect, the three he mentioned was obviously for national security, the second one is to retaliate against those suppliers that flood

the market illegally either with the snap-back provisions, and the

third is to allow a transition time for those workers who are being

replaced so that they can be educated so that they are not thrown

out of work and they just sit there with no job. So he mentioned

those three in ‘‘Wealth of Nations’’ as I recollect. Do you think

there is any other reasons to oppose free trade with tariffs other

than those three?

Mr. ROBERTS. Well, in those particular cases, I think he also

mentioned—I would be happy to send you the quotes online—he

also mentioned the danger of using those arguments because they

would likely become abused by the political process as special interests invoke those arguments. I think most economists recognize

those as potentially good arguments but understand that in practice they often are exploited.

So for example, I think the steel industry for about the last 120

years has been saying they need just a little more time to adjust

to foreign competition. I think it is about time to let them try to

stand on their own feet.

In the case of transition, I think the thing that CAFTA does that

is generally good is it would be cruel to someone who has had protection to say overnight it is gone. It is important to phase those

in slowly, those tariff reductions. I think in that case it makes

sense.

123

Those are the main arguments. On the case of national security

I think it is the strongest case. There are very few products in today’s world where national security is truly a legitimate issue——

Mr. STEARNS. Do you think——

Mr. ROBERTS. [continuing] on trade protection.

Mr. STEARNS. [continuing] having this country be able to have its

own agricultural sector is a national security and a reason——

Mr. ROBERTS. I don’t——

Mr. STEARNS. [continuing] for Americans——

Mr. ROBERTS. I don’t think so. I think our agricultural policy

with respect to tariffs and quotas—with all due respect to the gentleman on my right—makes no sense. There are many, many products that we do not have tariffs and protection for. Because we buy

them from lots of places that compete with each other, there is no

risk that we will be exploited by an enemy. And somehow those

products arrive at our groceries in great abundance even though

they are not subsidized, even though they are not protected, even

though they are not taken care of by a government policy. Self-interest on the part of farmers and consumers makes sure that those

products are there in great abundance. So I don’t see any reason

of why we have to worry about that as a national security issue.

Mr. STEARNS. Okay. Well, I am going to close the hearing and

thank all of you. I think the debate today has clearly demonstrated

the complexities of trade agreements, and we have seen the pros

and cons. And I really encourage my members of the subcommittee

to come here objectively to try and get to the facts and not try to

look at this relative to any political things. And I think all of you

have helped us. I also believe that the United States must be a

leader in economic progress, and to a certain extent, the United

States has its obligation.

So with that, thank you for waiting through the other two panels. And at this, the subcommittee is adjourned.

[Whereupon, at 3:36 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

PREPARED STATEMENT OF THE RETAIL INDUSTRY LEADERS ASSOCIATION

On behalf of the Retail Industry Leaders Association, we welcome the opportunity

to submit written comments for the record for this important hearing on the United

States-Dominican Republic-Central American Free Trade Agreement (DR-CAFTA),

now coming before the Congress for implementation. We strongly support the DRCAFTA agreement and urge swift Congressional passage of the implementing legislation.

By way of background, the Retail Industry Leaders Association (RILA) represents

the nation’s most successful and innovative retailer and supplier companies—the

leaders of the retail industry. As a sector, retail is the second largest industry in

the U.S., employing 12 percent of the nation’s total workforce and conducting $3.8

trillion in annual sales. RILA’s retail and product supplier companies operate

100,000 stores, manufacturing facilities and distribution centers in every congressional district in every state, as well as internationally. They pay billions in federal,

state and local taxes and collect and remit billions more in sales taxes. They are

also leading corporate citizens with some of the nation’s most far-reaching community outreach and corporate social responsibility initiatives.

RILA fully believes that passage of this agreement will:

• benefit the U.S. economy—producers and consumers alike;

• strengthen freedom and security in our Hemisphere;

• improve working conditions;

• activate critically important textile-apparel-footwear provisions; and

• enhance the legal framework for retail and distribution services.

124

THE DR-CAFTA WILL BENEFIT THE U.S. ECONOMY—PRODUCERS AND CONSUMERS ALIKE

Central America and the Dominican Republic make up the second-largest U.S. export market in Latin America, behind only Mexico. U.S. sales in the region exceed

$15 billion annually—more than is sold to Russia, India and Indonesia combined—

a result achieved in the absence of reciprocal trade liberalization. Upon full implementation of the agreement, U.S. goods will be able to enter the participating countries duty free. In fact, 80% of the commercial goods will become duty free once the

agreement is implemented, with the rest phased out over a ten-year period. This

will help to significantly increase U.S. exports of farm products, manufactured goods

and services to the region. According to a report by the International Trade Commission on the economic impact of the agreement, once the agreement is fully implemented, exports will grow by nearly $2.7 billion.

In addition to increased benefits for U.S. exporters, U.S. importers and their customers will benefit from implementation of the DR-CAFTA as well. Most Central

American products already enter the United States duty-free, under preference programs such as the Caribbean Basin Trade Partnership Act (CBTPA). Enshrining

this treatment in an international agreement with reciprocal obligations will provide

added commercial security as well as a firmer legal basis under WTO rules. This

aspect of the FTA is in effect a tax cut targeted to those consumers who need it

most.

THE DR-CAFTA WILL STRENGTHEN FREEDOM AND SECURITY IN OUR HEMISPHERE

Within recent memory, conditions in Central America have featured civil war,

chaos, dictators, and Communist insurgencies. Today, the region is one of fragile democracies that need U.S. support. Elected leaders are embracing freedom and economic reform, fighting corruption, and supporting U.S. anti-narcotics and anti-terrorism efforts. But this positive momentum cannot be taken for granted. Opponents

of reform in the region remain strong.

By implementing the DR-CAFTA, the United States can demonstrate its support

for freedom, democracy, the rule of law, and economic reform in Central America.

Doing so will bolster U.S. security in various ways. The new economic opportunities

will reduce the pressures that help produce illegal narcotics activity and illegal immigration.

THE DR-CAFTA TAKES THE RIGHT APPROACH ON WORKING CONDITIONS

America’s retailers are committed to careful supply chain management and high

ethical standards of corporate conduct in international sourcing. This applies to

products sourced in not just in Central America, but around the world. Our experience with the DR-CAFTA countries has shown that they share these values and

high standards, including the field of labor rights. Their constitutions and national

laws generally provide strong labor protections consistent with the International

Labor Organization’s four ‘‘core principles.’’ Indeed, labor protections in these countries are largely in line with those in Morocco and Jordan, whose accession to the

status of ‘‘FTA partner’’ gained overwhelming Congressional approval in recent

years.

The DR-CAFTA will promote economic opportunities and growth that are likely

to become powerful catalysts for improved working conditions in the region.

Through capacity-building and dispute settlement, the DR-CAFTA will also address

those circumstances where better enforcement of existing labor laws proves necessary.

THE DR-CAFTA’S TEXTILE-APPAREL-FOOTWEAR PROVISIONS WILL BENEFIT CONSUMERS

AND PRODUCERS THROUGHOUT THE VALUE CHAIN

The textile and apparel product category is a hugely important component of U.S.-

Central American trade, and retailers are committed to finding the best available

combination of speed-to-market, product price, and quality of products for their consumers. U.S. consumers will benefit from several innovative DR-CAFTA provisions

promoted by retailers to add needed flexibility to the outdated ‘‘yarn forward’’ rule

of origin. Moreover, qualifying textile and apparel products are to be afforded immediate U.S. duty free treatment.

Retailers are also quite interested in the health of regional textile and apparel

producers—our valued suppliers. The DR-CAFTA is strategically designed to improve their competitive situation at a time when, following the expiration of global

textile and apparel quotas, they face a formidable challenge from outside the hemisphere, most notably China. The DR-CAFTA will provide regional garment-makers—and their U.S. suppliers of fabric, yarn and other components—a boost in comVerDate 11-MAY-2000 11:43 Aug 30, 2005 Jkt 000000 PO 00000 Frm 00128 Fmt 6633 Sfmt 6621 21632.TXT HCOM1 PsN: HCOM1
125

peting with Asian producers and will support an estimated 400,000 jobs in the DRCAFTA countries and 700,000 jobs in the U.S. cotton, yarn, textile and apparel sectors.

In addition to benefits for textiles and apparel, there are significant benefits for

footwear imports in the DR-CAFTA. A solid consensus in all segments of footwear

manufacturing and retailing favors immediate duty-free treatment for footwear

traded among the DR-CAFTA countries, excluding a few import-sensitive tariff

lines. By delivering this outcome, the DR-CAFTA lays the groundwork for increased

trade and investment in the footwear sector, supports retailer strategies designed

to maintain geographically diverse sourcing options, provides substantial benefits to

consumers, and poses no risk to U.S. footwear production.

THE DR-CAFTA ENHANCES THE LEGAL FRAMEWORK FOR RETAIL/DISTRIBUTION SERVICES

For the first time in a trade agreement, the DR-CAFTA addresses restrictions on

distribution created through restrictive dealer protection regimes. Such regimes are

prevalent in Central America today and have locked U.S. companies and products

into inefficient, exclusive and effectively permanent relationships with local dealers

regardless of performance. DR-CAFTA rules would require dealer distribution agreements to permit parties to terminate at the end of the contract or renewal period

without indemnification. These rules will promote more efficient distribution for

U.S. companies and products in the DR-CAFTA region.

THE DR-CAFTA, ONCE IMPLEMENTED, CAN BE IMPROVED OVER TIME

No FTA is perfect, and as with other FTAs, experience under the DR-CAFTA may

reveal opportunities for useful adjustments in areas like rules of origin, accelerated

tariff phase-out, etc. Some improvements may require the negotiated approval of all

the DR-CAFTA parties; others may be of the type the United States can make unilaterally. The implementing legislation should establish a flexible and streamlined

framework for making such adjustments over time, using available tools such as

proclamation authority and consultation/layover.

RILA congratulates the Energy and Commerce Committee for turning its attention to this important agreement, and stands ready to assist as the implementation

process moves forward. If you have any questions, please contact Lori Denham, Senior Vice President Policy and Planning, Paul T. Kelly, Senior Vice President, Federal and State Government Affairs or Jonathan Gold, Vice President Global Supply

Chain Policy.

PREPARED STATEMENT OF LORI WALLACH, DIRECTOR, PUBLIC CITIZEN’S GLOBAL

TRADE WATCH

On behalf of Public Citizen’s 200,000 members, I thank the Committee for the opportunity to share my organization’s views on the proposed Central America Free

Trade Agreement (CAFTA) NAFTA expansion. Public Citizen is a nonprofit citizen

research, lobbying and litigation group based in Washington, D.C. with offices Austin, TX and Oakland, CA. Public Citizen, founded in 1971, accepts no government

nor corporate funds. Global Trade Watch is the division of Public Citizen founded

in 1995 that focuses on government and corporate accountability in the globalization

and trade arena.

CAFTA, signed in May 2004, would expand the economic model established in the

North American Free Trade Agreement (NAFTA) to five Central American countries

and the Dominican Republic. If approved, CAFTA, like NAFTA, would require its

signatory countries to conform their domestic policies and practices to a broad array

of non-trade dictates, for example regarding the regulation of service sector companies and foreign investors’ operations in other economic sectors operating within a

signatory nation’s territory. It would require signatories to provide certain patent

medicine and seed protections that have been criticized by health and consumer

groups worldwide as undermining consumers’ access to these essential ‘‘goods.’’ It

even sets constraints on how countries and other political entities may spend their

own tax revenues. In addition, CAFTA contains the same model of interconnected

trade rules and foreign investor protections that together create incentives that motivate business operations seek out the most profitable sites and processes for production, even if these are often contrary to the public interest.

An analysis of CAFTA’s provisions reveals that it replicated NAFTA’s provisions

to a high degree—often with identical language. Thus, there is much that we can

learn from the 11-year record of NAFTA, which CAFTA would expand to additional

nations.

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1. CAFTA NAFTA Expansion is an Outsourcing Agreement: Eleven-Year

Record Demonstrates that the NAFTA Model Lowered Living Standards

on Both Sides of the Border

Since 1994, the United States has lost nearly 1 million jobs on net due to NAFTA

trade,1 with one in six U.S. manufacturing jobs being eliminated during the NAFTA

decade.2 U.S. income and wage inequality have gone up markedly, with the ratio

of both income and wages of the top five percent of the income and wage distribution growing nearly 10 percent since NAFTA alone as compared with the bottom 20

percent.3 The U.S. real median wage has scarcely risen above its 1970 level, resulting in declining or stagnant standards of living for the nearly 70 percent of the U.S.

population that does not have a college degree.4 During the NAFTA era, the U.S.

trade deficit has risen to historic levels, and approaches six percent of national income—a figure widely agreed to be unsustainable, putting the U.S. economy at risk

of lowered income growth.5 The U.S. trade balance with NAFTA countries alone

went from a mild surplus with Mexico and mild deficit with Canada to a ballooning

deficit with the two countries exceeding $110 billion in 2004.6

For our neighbors in Mexico, the economic outcomes of eleven years of NAFTA

are not brighter. Over 1.5 million Mexican campesino farmers lost their livelihoods

to the dumping of commodities such as corn as a result of NAFTA’s agricultural

rules,7 while the Mexican minimum wage has lost 20 percent of its value in real

terms, and the median industrial wage 10 percent of its value 8. The jobs that were

temporarily created in the country’s maquiladora sector in NAFTA’s initial years,

as plants relocated from the United States, are increasingly relocating and losing

market share to lower wage countries such as China.9

In both countries, the increased ability of companies to nearly effortlessly relocate

production to lower wage countries—(as NAFTA’s investor protections forbid the

policies a country like Mexico might otherwise use to root foreign direct investment

for development)—has tilted the playing field against the majority of the working

population who are finding it ever more difficult to obtain and maintain quality employment. Meanwhile, studies commissioned by the U.S. government show that as

many as 62 percent of U.S. union drives face employer threats to relocate, with over

10 percent of such threats specifically referring to a relocation to Mexico. The actual

factory shut-down rate following successful union certifications tripled in the years

after NAFTA relative to the years before.10

2. Contradicting Congress’ Demand that Trade Pacts Give Foreign Investors ‘‘No Greater Rights’’ within the U.S. than Available to U.S. Citizens,

CAFTA Extends NAFTA’s Special Protections for Foreign Investors that

Expose U.S. Taxpayer Funds to Claims in Closed Trade Tribunals

The changes described above in the NAFTA country labor markets are supported

by the granting in NAFTA and CAFTA of special rights and privileges to foreign

investors from one signatory country operating in another. In NAFTA, these rights

are contained in Chapter 11, which also provides for foreign investors’ private enforcement of these new privileges through so-called investor-state dispute resolution,

a controversial mechanism also included in CAFTA. The investor-state system allows corporations to sue governments for cash compensation before closed trade tribunals for claims based on signatory countries’ policies that may or may not have

a demonstrable economic impact on their expected future earnings. The provisions

afford foreign investors operating in the United States greater rights than those

available to U.S. citizens and businesses under the U.S. Constitution as interpreted

by the U.S. Supreme Court. Thus far, 42 cases have been brought before the NAFTA

investor-state tribunals, 11 have been finalized, and some $35 million in taxpayer

funds have been granted to five corporations that have succeeded with their claims.

An additional $28 billion has been claimed from investors in all three NAFTA nations in cases attacking the most basic functions of government. The U.S. government’s legal costs for the defense of just such recent case topped $3 million, and

seven cases against the United States are currently in active arbitration.

While ostensibly, NAFTA’s investor protections were designed to ensure compensation if property is nationalized by a NAFTA government, only one of the 42

known NAFTA ‘‘Chapter 11’’ cases filed to date involve expropriation. Instead, investors have challenged domestic court rulings, water rights, local and state environmental policies, municipal contracts, tax policy, controlled substances rules, antigambling policies, emergency efforts to halt the spread of mad cow disease, and even

provision of public postal services.

Given that these extraordinary investor rights and their private enforcement had

not been part of any previous U.S. trade agreement, and that many Members of

Congress did not understand these implications at the time when NAFTA was enacted in 1993, the record of NAFTA’s Chapter 11 has generated enormous conVerDate 11-MAY-2000 11:43 Aug 30, 2005 Jkt 000000 PO 00000 Frm 00130 Fmt 6633 Sfmt 6621 21632.TXT HCOM1 PsN: HCOM1
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troversy. Thus in order to obtain a congressional delegation of Fast Track Trade Authority in 2002, the administration offered to address Congress’ concerns. Fast

Track thus specified that in future U.S. trade agreements, foreign investors should

not have ‘‘greater substantive rights with respect to investment protections than

United States investors in the United States.’’ 11

Unfortunately, the Executive Branch negotiators failed to meet Congress’ requirements. In CAFTA’s Chapter 10 foreign investor protections and investor-state mechanism actually amplify many of the problems Congress identified with NAFTA. • CAFTA Would Allow Compensation to Foreign Investors in ‘‘Regulatory

Takings’’ and ‘‘Minimum Standard of Treatment’’ Cases not Permitted by

U.S. Law: CAFTA includes the NAFTA language that requires foreign investors be

compensated for ‘‘indirect expropriation.’’ This provision has been the basis for an

array of cases that would not be permitted under U.S. law, including regulatory

takings cases. In one such case, Metalclad Corporation obtained $16 million from

the Mexican Treasury after being denied a permit to expand a toxic waste facility

until it cleaned up existing contamination.12 Several additional CAFTA provisions

promote regulatory takings cases not allowed under U.S. law. For instance, the Supreme Court has ruled that ‘‘mere diminution in the value of property, however serious, is insufficient to demonstrate a taking’’ 13 and that the entire property must be

affected permanently. In contrast, NAFTA Chapter 11 tribunals have found that a

government action need only cause ‘‘significant’’ or ‘‘substantial’’ impairment of an

investment’s value to qualify as a taking.14 For instance, the Metalclad tribunal held

that ‘‘expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property... but also covert or incidental interference with the use

of property which has the effect of depriving the owners in whole or significant part,

of the use or reasonably-to-be-expected economic benefit of property.’’ 15 USTR failed

to remedy this problem in CAFTA.

To make matters worse, CAFTA allows such claims regarding types of property

not subject to takings action under U.S. law. U.S. law deems public interest policies

governing personal property (property other than land) to be legitimate exercises of

police powers and exempt from takings claims. In contrast, CAFTA’s broad definition of what categories of property are subject to compensation claims includes an

array of non-real estate property such as assumption of risk and also bonds, loans,

stocks, and intellectual property rights.

In response to criticism that investment rules in CAFTA allow for broad regulatory takings claims, the USTR will likely point to CAFTA, Annex 10-C, which

reads: ‘‘Except in rare circumstances, nondiscriminatory regulatory actions by a

Party that are designed and applied to protect legitimate public welfare objectives,

such as public health, safety, and the environment, do not constitute indirect expropriations.’’ 16 Unfortunately, this language has precisely the opposite effect claimed.

This language enshrines the right of foreign investors to challenge a wide array of

public health and safety regulations not be subject to U.S. taking claims. U.S. law

safeguards all public interest regulations governing personal property, yet this language reiterates that such policies are subject to CAFTA challenge. Moreover, the

U.S. government would have no capacity to affect whether such cases are brought

only in ‘‘rare’’ circumstances. Foreign investors decide whether to file these cases.

(And, the U.S. legal defense cost for just one such case, Methenex’s attack on California’s ban on the gasoline additive MTBE, has already cost $3 million in U.S. taxpayer funds.) Further, the ultimate decision whether or not to grant compensation

in such challenges remains with investor-state tribunals on a case-by-case basis.

Moreover, when deciding such cases, tribunals will reference other specific provisions of CAFTA that directly conflicts with the Annex’s general language. There

have been numerous NAFTA cases involving toxic substances, including Phillip

Morris’ threat against a proposed Canadian tobacco control law, and Canadian

cattlemen’s NAFTA challenge of U.S. actions to prevent entry into the U.S. of mad

cow disease. To avoid future such cases and to bring CAFTA into conformity with

U.S. takings law, the scope of property subject to such claims in CAFTA needed to

have been limited to real estate and the ‘‘indirect expropriation’’ language needed

to have been eliminated, or at least defined in the context of U.S. takings standards

that require that virtually all of a property’s value must be taken permanently to

obtain compensation.

• CAFTA Would Allow Compensation to Foreign Investors in Cases in

which U.S. Law Only Permits Injunctive Relief: Under U.S. law, both foreign

and domestic firms can sue under the Due Process or Equal Protection Clauses of

the Constitution for injunctive relief, but they are not allowed to sue for monetary

relief. Under NAFTA’s investment rules—and under CAFTA were it to be approved—foreign investors are empowered to sue for monetary relief on similar

grounds. CAFTA extends this NAFTA problem by allowing foreign investors to obVerDate 11-MAY-2000 11:43 Aug 30, 2005 Jkt 000000 PO 00000 Frm 00131 Fmt 6633 Sfmt 6621 21632.TXT HCOM1 PsN: HCOM1
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tain taxpayer compensation not only for claims of expropriation, but also based on

national treatment (non-discrimination) and ‘‘fair and equitable treatment’’ claims—

which are the trade agreement equivalent to Due Process or Equal Protection

Clauses claims in U.S. law.

• CAFTA Would Eviscerate the Long-established Principle that Governments Can Remedy a ‘‘Nuisance’’ without Compensating Polluters: The expansive definition in CAFTA of what sorts of foreign investments are subject to compensation covers government actions to prevent a public nuisance. Given the record

of the related NAFTA provisions, this element of CAFTA is likely to generate further claims by chemical companies attempting to combat environmental regulation.

Under NAFTA, foreign investors are demanding compensation for California’s ban

of the gasoline additive MTBE which has been found to be polluting scarce water

resources in the state and for California’s open pit mining reclamation law. Yet,

under the U.S. Supreme Court holding in Lucas v. South Carolina Coastal Council,

pollution that harms public or other properties is a nuisance that can be regulated

by states without compensation.17 USTR failed to remedy this problem in CAFTA.

• CAFTA Would Empower Foreign Investors to Overcome the Long-established Sovereign Immunity Shield to Pursue U.S. Taxpayer Compensation

In Property Claims from which U.S. Residents and Companies Are Barred:

NAFTA panels have explicitly refused to dismiss investor challenges when governments have raised sovereign immunity as a defense in investor-state challenges—

apparently allowing firms to sue governments at any level regarding any issue for

any amount of money. Indeed, in these cases, investor-state tribunals have accepted

the argument raised by some foreign investors that Congress waived federal sovereign immunity when it passed NAFTA. USTR failed to remedy this problem in

CAFTA with explicit language clarifying that sovereign immunity was not waived,

thus providing an open door for future such challenges.

3. CAFTA Would Forbid Congressional, States’ Anti-Offshoring Policies that

Require Government Contract Work be Done by U.S. Workers; Forbids

Environmental, Other Procurement Rules

CAFTA’s rules on government procurement apply to an array of federal government agencies as well as the states that are listed as ‘‘covered entities’’ in Chapter

9, Annex 9.12 (b) (i). In September 2003, the United States Trade Representative

sent a letter to all 50 governors, requesting that they commit their states to be

bound by the procurement provisions in all bilateral and regional trade pacts under

negotiation, including CAFTA. The letter touted the potential for U.S. suppliers to

bid on foreign government contracts, but failed to mention the requirements the procurement chapters CAFTA and other agreements imposed on states. Initially, twenty eight states were listed as bound in the CAFTA text. However, since then, state

officials have become much more aware of the implications that binding state procurement policy to CAFTA’s rules would have on their ability to determine what

procurement policies are in the best interests of the state, including policies that

use state purchasing power to further social, environmental, and economic development goals.

As a result, a majority of U.S. states (30) have rejected CAFTA’s government procurement rules and decided it is not in their best interest to be bound. In 2004, seven

governors (from Iowa, Kansas, Maine, Minnesota, Missouri, Oregon, and Pennsylvania) rescinded their previous commitments on behalf of their states to be bound

to CAFTA’s procurement rules. Other states (Montana, Nevada, Wisconsin, and Virginia) declined the USTR’s request outright. Governors of states that remain bound

by CAFTA, including Texas and Washington, have requested that additional reservations be taken. (Only some of those requests have been incorporated into the

CAFTA text. Washington’s request was rejected in an August 13, 2004 letter from

Ambassador Zoellick to Washington Governor Gary Locke.) In early 2005, the National Conference of State Legislatures wrote to the USTR, requesting that the

USTR respond to the myriad concerns of state legislators. The Intergovernmental

Policy Advisory Committee (IGPAC) issued recommendations in August 2004 that

state legislative leaders be carbon copied on all requests sent to governors, as state

legislators to date have been cut out of the consultation process, despite the fact

that in most states, the Legislative Branch has the authority to set state procurement policy. The USTR explicitly denied that request, and sent another letter to

governors requesting that they sign on to the procurement provisions of free trade

agreements with Panama and Andean countries. Most recently, in April 2005, the

Maryland General Assembly passed legislation over Governor Ehrlich’s veto which

stipulated that it was the authority of the legislature, not the Governor, to sign on

to the government procurement rules in trade pacts. The bill also declared invalid

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previous expressions of consent made by governors, including Governor Ehrlich’s letter offering to bind Maryland to CAFTA’s procurement provisions.

State officials’ concerns stem from the restrictions that CAFTA’s rules impose on

their ability to maintain existing and adopt new procurement policies in the public

interest. CAFTA’s procurement chapter prohibits many common purchasing policies,

seriously weakening governments’ flexibility to use procurement as policy tool to

promote economic development, environmental sustainability, and human rights.

These rules also apply to federal government procurement policies: • Requirements that Government Work Be Performed in the United

States by U.S. Workers Are Prohibited: If CAFTA were approved, federal and

state governments would be required to treat companies located in the six CAFTA

countries identically to U.S. domestic companies when governments seek to procure

goods and services. This means neither Congress nor state governments could give

preference to domestic or local firms or require that to obtain government contracts,

firms must employ U.S. workers (CAFTA Article 9.2). • Sweat-Free, Recycled Content, Renewable Source and Other Labor and

Environmental Criteria Banned: CAFTA requires that ‘‘a procuring entity shall

not prepare, adopt or apply any technical specification describing a good or service

with the purpose or the effect of creating unnecessary obstacles to trade’’ and that

technical specifications are limited to ‘‘performance requirements rather than design

or descriptive characteristics.’’ These constraints mean that procurement policies

that set criteria for how a good is made or how a service is provided are prohibited—putting preferences for recycled content or renewable energy, ‘‘green’’ building

requirements, and bans on goods made with the worst forms of child or slave labor

at risk as ‘‘barriers to trade’’ (CAFTA Article 9.7).

• Consideration of Bidding Firms’ Labor, Tax, Environmental, Human

Rights Records Forbidden: CAFTA limits what sorts of qualifications may be required of companies seeking to supply a good or service to a government. Conditions

for participation in bidding are limited to ‘‘those that are essential to ensure that

the supplier has the legal, technical and financial abilities to fulfill the requirements

and technical specifications of the procurement.’’ CAFTA’s limits on the requirements that can be imposed on contractors prohibit conditions such as prevailing

wage and living wage requirements, as well as consideration of suppliers’ environmental or labor track records (CAFTA Article 9.8).

4. Opposition to CAFTA NAFTA Expansion Wide and Varied, Having Grown

Since NAFTA

As successive administrations have failed to reverse the damage and demonstrated, significant problems of NAFTA’s foreign investor protection model, opposition has grown in all quarters. The Association of State Supreme Court Justices,

U.S. League of Cities, National Conference of State Legislatures, National Association of Counties, and National Association of Towns and Townships all have expressed concerns about the investment provisions of CAFTA.

Concerns about CAFTA’s foreign investor protection by these typically pro ‘‘free

trade’’ associations of state and local officials, groups that are concerned about our

nation’s system of federalism and the integrity of our domestic courts, has been

joined by outright opposition to CAFTA from other unexpected quarters, suggesting

the degree to which this agreement signed a year ago is seen not to serve the U.S.

national interest. The National Association of State Departments of Agriculture, for

one, concerned about CAFTA’s agricultural provisions called on Congress to oppose

CAFTA.18 These and other agricultural groups are concerned about declining farm

revenue even as volumes of food trade increased under NAFTA, and that the United

States is about to become a net food importer. Furthermore, these groups take to

heart the claims of pro-CAFTA forces, who continually repeat that CAFTA is a stepping stone to a proposed broader Free Trade Area of the Americas (FTAA).19 Many

U.S. economic sectors views of CAFTA are tied to their analysis of how competition

with Brazil in a NAFTA expansion from Alaska to Tierra del Fuego would affect

their export capacity in beef, soy, citrus, sugar and ethanol.

Many other groups have also expressed opposition to CAFTA NAFTA expansion.

Human Rights Watch has produced analyses of the failure of Central American

labor law and enforcement practices to meet the minimal International Labor Organization core labor standards,20 an analysis that has been confirmed by the U.S. Department of State’s annual human rights reports.21

And U.S. Latino organizations who supported NAFTA, from the nation’s largest

and oldest Hispanic civil rights organization the League of United Latin American

Citizens to an array of immigrant rights groups representing Central Americans in

the United States, have also indicated their opposition the current terms of the

agreement, concerned that trade-related job loss disproportionately affects U.S.

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Latinos and that CAFTA’s negative repercussions for Central America are foretold

by NAFTA’s negative results in Mexico.22

5. Central American Public Opposition to CAFTA NAFTA Expansion Is

Based on NAFTA’s Record of Destroying the livelihoods of 1.5 Million

Mexican Small Farmers and U.S. Heavy-Handed Tactics Forcing PriceRaising Medicine Policies, Essential Service Privatizations

Lawmakers concerned about the implications of the so-called ‘‘Arab Street’’ in the

Middle East should also pay attention to the passionate CAFTA opposition on the

‘‘Latin Street’’ of Central America. Nearly one out of every 25 El Salvadorans have

publicly rallied against CAFTA in the past several years, and polls indicate that a

majority of citizens in Guatemala and elsewhere oppose the terms of CAFTA.23 In

Honduras, Guatemala and Nicaragua, massive protests have also occurred against

CAFTA, while it is unclear if Costa Rica’s congress will approve the deal.24

Officials from the U.S. Trade Representative’s office have taken to threatening

Costa Rica that if the democratically-elected Congress there determines the pact is

not in their nation’s interest and rejects it, the United States will remove that nation’s existing terms of access to the U.S. market provided under the Caribbean

Basin Initiative (CBI). These threats continue today despite the March 2005 letter

by Ways and Means Committee Ranking Member Charles Rangel (D-NY) calling

upon the administration to desist these misleading pronouncements. As Rep. Rangel’s letter pointed out, CBI is a ‘‘congressionally mandated program [whose] benefits are guaranteed on a permanent basis, unless the Congress amends current U.S.

law.’’ The representative said he would oppose such an amendement of U.S. law,

characterizing the administration’s remarks as ‘‘thinly veiled blackmail.’’ 25

Regardless of the Administration’s bullying and disrespectful treatment of some

CAFTA countries, certainly Congress would be concerned with the underlying cause

of such passionate opposition to CAFTA in Central America—opposition whose protests have been met with increasing violence by governments. This includes the

murder by military troops in Guatemala of two Mayan protestors—an act of military

violence by the army explicitly forbidden in the 1996 peace accords.26

The causes of opposition include CAFTA’s service sector rules, which would require these nations to privatize and deregulate numerous essential services such as

energy and other utilities, health care and more, as well as foreign investor protections, which would create a new set of rights for foreign investors to acquire ownership over natural resources and land and pharmaceutical patent requirements, including extended data exclusion terms, which would hurt poor people’s access to

medicines and take Central American governments’ abilities to respond to public

health crises such as HIV-AIDS. Fury about these severe threats has been exacerbated by the administration’s heavy handed tactics, for instance in pressuring Guatemala to rescind a law that would have improved access to generic, life-saving

medicines or in threatening Costa Rica with removal of CBI benefits.27

Now major Central American political parties, Catholic bishops, the Central

American Council of Churches and other mainstream, important Central American

interests have come out against CAFTA as a threat to the region. In addition, eighteen of the most democratic, independent and representative union federations

throughout Central America representing workers in the private and public sector,

including in export-oriented manufacturing and agriculture, have demanded stronger workers rights than those provided under CAFTA.28 They have noted that the

existing CBI arrangement affords concerned citizens with the International Labor

Organization core rights and with the greater ability to improve Central American

labor law than the proposed CAFTA’s roll-back CBI labor provisions.

6. Given the NAFTA Record and Growing Central American Public Opposition, CAFTA Supporters Resort to Increasingly Dubious Arguments’

Given this broadscale U.S. and Central American opposition to a NAFTA expansion, pro-CAFTA forces have increasingly resorted to disconnected arguments and

exaggerated and misrepresentative claims about the agreement. For instance, the

U.S. Chamber of Commerce has produced a flawed study projecting U.S. economic

gains from a Central America agreement. But to obtain that conclusion, the Chamber had to assume that—contrary to the history of every trade agreement the

United States has signed—the United States would receive no new imports from the

CAFTA countries if the pact went into effect.29 The study’s methodology additionally

implies that over 80 percent of the Honduran economy would have to absorbed by

U.S. exports by 2013, a potentially socially and economically destabilizing outcome

if true.30

Despite this projection that Central American countries would not gain from a

CAFTA, pro-CAFTA forces have simultaneously asserted that CAFTA would save

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the U.S. and Central American textile industries from the end of the global textile

and apparel quota system.31 Here too, their claims are wildly misleading, since experts from the U.S. International Trade Commission to the Organization for Economic Cooperation and Development (OECD) have demonstrated that China enjoys

a significant technological, wage and input cost advantage over the Central American countries. This means that, with or without a CAFTA, the expiration of the

Multi Fiber Arrangement quota system will result in Central America losing a great

deal of its current production and employment in the textile and apparel industry.

The notion that CAFTA would affect this situation is beyond bizarre. Already

under CBI, CAFTA countries’ textile and apparel exports enter the United States

duty free. CAFTA provides no additional benefit for entry. Indeed, CAFTA loosens

the CBI rules of origin, meaning more Chinese goods could enter through CAFTA

countries if CAFTA were implemented than are now permitted.

Already, apparel imports from China jumped amount in the first quarter, and by

as much as 1,521 percent in some customs categories.32 While Congress may seek

to address this flood of cheap Chinese imports, this is a separate problem than

CAFTA and would require a separate solution. The debate around CAFTA is not

a question of ‘‘whether U.S. workers would rather lose their jobs to China or to Central America,’’ as Carlos Sequeira, Nicaragua’s chief CAFTA negotiator put it.33 Congress should instead focus on the flaws of CAFTA, which would loosen CBI’s requirement that U.S. inputs be used to enjoy duty-free access to the U.S. market and

undermine CBI’s labor rights protections, while still not proffering to the dying Central American industry any access benefits that they do not already enjoy through

CBI.

CONCLUSION

The bottomline in Congress’ consideration of CAFTA should be whether extending

the NAFTA model will help us create a brighter future for our children and grandchildren. Even considering only the well-documented NAFTA record of undermining

the livelihoods of 1.5 million Mexican farmers, suppressing real median wages in

the United States and Mexico, gutting the U.S. manufacturing base, coinciding with

record-low prices paid farmers for the food they produce in all three countries even

while consumer prices increased, and exposing some 42 domestic environmental,

health, zoning and laws and regulations to attack in closed investor-state tribunals

and the payment of some $35 million in taxpayer funds to foreign investors for the

lost NAFTA-guaranteed profits they lost, it seems quite clear the answer is no. If

one adds to the NAFTA evidence the problems caused by the CAFTA provisions that

go beyond even what NAFTA requires—for instance in the foreign investor protections chapter or regarding drug patents—the answer becomes only clearer.

As a group that works with consumer organizations around the world, we would

urge Congress to oppose this agreement simply on the basis of its intellectual property rules which are certain to undermine affordable access to essential medicines

for poor consumers in the Central America. Many other organizations are submitted

testimony about these scandalous provisions of CAFTA NAFTA expansion. At issue

are life or death matters: generic versions of the cocktail of anti-retroviral drugs essential to extending the lives of those infected with HIV cost several hundred dollars

for a yearlong course while the brand name patented version of the same drugs cost

$5,000 per year. If the CAFTA drug patent rules would go into effect in the Central

American countries and the Dominican Republic, many people now able to have access to these life saving HIV-AIDS medicines and also drugs vital to fighting tuberculosis and other deseases will not have access to these medicines—either because

they cannot afford to purchase them or because their government health agencies

cannot afford them to provide to their public.

Thus given CAFTA NAFTA expansion’s potential extension of the failures of

NAFTA to people in six additional nations and the damage to U.S. residents that

further extension of this model would pose, we urge Congress to oppose NAFTA’s

expansion to Central America and beyond.

Endnotes

1 Robert E. Scott, ‘‘The High Price of ‘Free’ Trade: NAFTA’s Failure has cost the United States

jobs across the nation,’’ Economic Policy Institute Briefing Paper, Nov. 2003. 2This number refers to manufacturing job loss since the most recent manufacturing employment peak in 1998 of 17.6 million, relative to the 2003 number of 14.6 million. See Josh Bivens,

Robert Scott, and Christian Weller, ‘‘Mending manufacturing: Reversing poor policy decisions is

the only way to end current crisis,’’ Economic Policy Institute Briefing Paper #144, Sept. 2003. 3Lawrence Mishel, Jared Bernstein, and Sylvia Allegretto, The State of Working America

2004/05, (Washington, DC: Cornell University Press, 2004), at 69 and 145. 4Lawrence Mishel, Jared Bernstein, and Sylvia Allegretto, The State of Working America

2004/05, (Washington, DC: Cornell University Press, 2004), at 154.

132

5 Nouriel Roubini and Brad Setser, ‘‘The US as a Net Debtor: The Sustainability of US External Imbalances,’’ New York University Briefing Paper, Nov. 2004. 6 U.S. Census Numbers.

7 John Audley, Sandra Polaski, Demetrios G. Papademetriou, and Scott Vaughan, ‘‘NAFTA’s

Promise and Reality: Lessons from Mexico for the Hemisphere,’’ Carnegie Endowment for International Peace Report, Nov. 19, 2003. 8 Carlos Salas, ‘‘Highlights of Current Labor Market Conditions in Mexico,’’ Global Policy Network Country Brief, April 2003. 9Sanjaya Lall, Manuel Albaladejo, Mauricio Mesquita Moreira, ‘‘Latin American Industrial

Competetitveness and the Challenge of Globalization,’’ Inter-American Development Bank

OCassional Paper SITI 05, June 2004. 10Kate Bronfenbrenner, ‘‘The Effects of Plant Closing or Threat of Plant Closing on the Right

of Workers to Organize,’’ North American Commission for Labor Cooperation Report, 1997. 11 19 U.S.C. § 3802(3), Chapter 24, ‘‘Bipartisan Trade Promotion Authority: Trade Negotiating

Objectives.’’ 12 Award, Before the Arbitral Tribunal constituted Under Chapter 11 of the North American

Free Trade Agreement, Metalclad Corporation v. the United Mexican States, International Centre for Settlement of Investment Disputes (Additional Facility), Aug. 25, 2000. 13 Concrete Pipe and Products v. Construction Laborers Pension Trust, 508 U.S. 602, Jun. 14,

1993, at 615. 14 Interim Award by Arbitral Tribunal, In the Matter of an Arbitration Under Chapter 11 of

the North American Free Trade Agreement between Pope & Talbot Inc. and the Government

of Canada, United Nations Commission on International Trade Law, Jun. 26, 2000, at 37;

Award, Before the Arbitral Tribunal constituted Under Chapter 11 of the North American Free

Trade Agreement, Metalclad Corporation v. the United Mexican States, International Centre for

Settlement of Investment Disputes (Additional Facility), Aug. 25, 2000, at 28. The Metalclad

panel stated that expropriation under NAFTA ‘‘includes not only open, deliberate and acknowledged takings of property such as outright seizure or formal or obligatory transfer of title in

favor of the host state, but also covert or incidental interference with the use of property which

has the effect of depriving the owner in whole or in significant part of the reasonably-to-be-expected economic benefit of the property.’’ 15 Award, Before the Arbitral Tribunal constituted Under Chapter 11 of the North American

Free Trade Agreement, Metalclad Corporation v. the United Mexican States, International Centre for Settlement of Investment Disputes (Additional Facility), Aug. 25, 2000, at 33. 16 Central America Free Trade Agreement, Final Version, Aug. 5, 2004, Annex 10-C, at 4(b). 17Lucas v. South Carolina Coastal Council, 505 U.S. 1003, at 1015-19 (1992). 18 Alan Guebert, ‘‘State Ag Directors Whack CAFTA, White House,’’ Aberdeen News, March 11,

2005. 19 Jorge Arrizurieta, ‘‘A needed precursor to FTAA,’’ Florida Sun Sentinel, March 11, 2005 20Michael Bochenek, ‘‘Turning A Blind Eye: Hazardous Child Labor in El Salvador’s Sugarcane Cultivation,’’ Human Rights Watch Report, June 2004; ‘‘Pregnancy-Based Sex Discrimination in the Dominican Republic’s Free Trade Zones: Implications for the U.S.-Central America

Free Trade Agreement (CAFTA),’’ Human Rights Watch Briefing Paper, April 2004; Carol Pier,

‘‘Deliberate Indifference: El Salvador’s Failure to Protect Workers’ Rights—implications for

CAFTA,’’ Human Rights Watch Report, Dec. 2003; Judith Sunderland, ‘‘From The Household To

The Factory: Sex Discrimination in the Guatemalan Labor Force,’’ Human Rights Watch Report,

Jan. 2002. 21 U.S. Department of State, ‘‘Report on El Salvador,’’ 2001 Country Reports on Human Rights

Practices. 22 ‘‘Another America is Possible: The Impact of NAFTA on the U.S. Latino Community and

Lessons for Future Trade Agreements,’’ LCLAA and Public Citizen, Aug. 2004 23 Angus Reid Global Scan, ‘‘Guatemalans Decry CAFTA Deal With U.S.,’’ April 2005 24Karen Hansen-Kuhn, ‘‘Central Americans Speak Out Against DR-CAFTA: Major Issues and

Mobilizations,’’ Alliance for Responsible Trade, Mar. 2005, at 10. 25 Rep. Charles B. Rangel, ‘‘Rep. Rangel Reacts to Reported ‘Threat’ from Administration Official to CAFTA Countries,’’ Press Statement, March 22, 2005. 26Sergio de Leon, ‘‘Police, protestors clash ahead of Guatemala-U.S. free trade vote,’’ Associated Press, Mar. 9, 2005. 27 Catherine Elton, ‘‘Activists Fear Free Trade Act Will Restrict Access to AIDS Drugs in Central America,’’ Voice of America, April 2005. 28 ‘‘The Real Record on Workers’ Rights in Central America,’’ AFL-CIO, Apr. 2005. 29 U.S. Chamber of Commerce, ‘‘Chamber Hails Economic, Job Benefits of DR-CAFTA,’’ Issue

Briefing, Feb. 2005. 30Todd Tucker, ‘‘Fool Me Twice? Chamber of Commerce Distorts NAFTA Record, Hides

CAFTA Costs,’’ Public Citizen, Mar. 2005. 31 Rossella Brevetti, ‘‘Ambassadors from Central America, Dominican Republic Urge Action on

FTA,’’ BNA No. 27, Feb. 10, 2004. See also, Martin Vaughan, ‘‘Pro-CAFTA Business Alliance

Lobbying House Members,’’ Congress Daily PM, Jan. 25, 2005. 32Kristi Ellis, ‘‘China’s First Qtr Surge,’’ Women’s Wear Daily, April 4, 2005. 33Paul Magnusson, ‘‘This Trade Pact Won’t Sail Through,’’ Business Week, March 28, 2005.

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